Peer 2 Peer Lending Platforms 250The Lending Club Example:  Here’s a quick rundown of how the P2P lending business works — and if this alternative mode of lending could be appropriate for average consumers.

Since its launch in 2007, Lending Club has served as an alternative to traditional credit lenders for consumers looking for small loans at decent interest rates.  The company couldn’t have had better timing. In the wake of the 2008 financial crisis, banks and lenders grew so tightfisted that it became increasingly difficult for subprime borrowers to get access to loans. Peer-to-peer lenders like Lending Club (and its main competitor, Prosper) were more willing to take on these riskier borrowers.

The biggest difference between peer-to-peer lenders and traditional lenders is that the loans are backed by everyday investors. Think of them like Uber but for loans.

What do I need to do to qualify for a loan?

Both Prosper and Lending Club require borrowers to fill out an application for loans online. Unlike typical credit applications, however, they only count as “soft” inquiries on your credit report and won’t negatively impact your credit score. If approved, your interest rate will depend on your credit score, loan amount, loan term, and credit usage and history. The minimum credit score required to qualify for Lending Club is 660 and 640 for Prosper.  

Because each state has its own regulations about securities and investing, borrowing and investing from P2P lenders isn’t allowed everywhere. Some states may allow P2P borrowing, while blocking P2P investing, and vice versa. For borrowers, Lending Club is allowed in all but five states (Iowa, Idaho, Maine, North Dakota, and Nebraska). Prosper is blocked in Iowa, Maine and North keeps an updated map of states that allow P2P transactions.

How much can I borrow?  

Personal loans start as low as $1,000 and can’t exceed $35,000. For small businesses, loans start at $15,000 and are capped at $100,000. Prosper loans range from $2,000 – $35,000 for both personal and small business use. The vast majority (83%) of Lending Club borrowers use their loans to refinance existing loans or pay off their credit cards, and about 5% use loans for home improvement projects.  Loans are issued with three or five-year terms, with monthly payments.

What’s so great about P2P loans anyway?

The biggest draw for P2P loans are their interest rates — as low as 7% for borrowers with stellar credit. The average Lending Club interest rate is around 14.7% (slightly higher than the national average for 13%). Considering that the average borrower on the site typically carries debt with a 20.7% interest rate, it can be a much cheaper option to consolidate that debt and go the P2P lending route. That being said, the more risky a borrower appears, the higher their rates will be — just like a traditional mortgage lender or credit card issuer. (Lending Club’s rates go as high as 24.63%, while Prosper’s interest rates are as high as 35.36%).

Here’s a sample of Lending Club’s interest rates. (“Loan Grade” refers to creditworthiness of the borrower, with A being the most creditworthy.

How long will it take to pay my loan off? 

P2P loans are issued with three- or five-year terms, with monthly payments.  The fact that they’re term-based is another reason to favor them over traditional bank loans.

“Some people like the idea of having a fixed term for the payment,” says Peter Renton, founder of, an educational site for novice P2P borrowers and investors. “It’s a kind of enforced discipline. They know they have three or five years on a loan and they will have paid off their debt.”

Are there any hidden fees?

Prosper and Lending Club both charge fees for new loans (1.11% to 5% of the total loan amount at Lending Club, 1% to 5% for Prosper), depending on the size of the loan. The origination fee is included in your APR and subtracted from your total loan balance before you receive it.

If you’re late on payments, however, fees start to pile up. Both sites charge $15 for payments that bounce back and either 5% or $15 (whichever is greater) for payments that are more than 15 days late. If you want to pay with checks, there’s another $15 fee for processing (clearly, online payments are the way to go)

Any tips for a beginner borrower?

You never want to take out a loan that is more than you actually need. Like any type of loan, whether it’s from a bank or a P2P lender, falling behind on payments means paying even more in the long term.

Renton always counsels borrowers to take out the shortest term loans. Shorter terms means lower interest payments.

“The five-year loan is always seductive because it has a lower monthly payment,” he says. “But your interest bill is going to be a lot more.”

Another pro tip: Renton says you might score a lower rate on your loan if you apply for an amount that’s slightly less than a round number. For example, take out a $4,995 loan rather than $5,000. (Because P2P lenders don’t publish the interest rates for loan amounts, we can’t verify this tip, but it may be worth a try.)
Do your homework:

P2P loans can be an inexpensive way to tackle many debts at once. But you should be aware of other options, too. Plenty of credit lenders have 0% balance transfer offers. You can also check to see what the rates are for debt consolidation loans at your bank or credit union.

For more information, there are plenty of free resources on the web that you can use before taking out a P2P loan. offers a free ebook on P2P lending, which you can downloadhere. is another great resource and offers daily newsletters with tips for P2P borrowers and investors, alike.

Source: YahooFinance