Posts Tagged ‘Peer-to-Peer Loan Primer’

How to Get a Person-to-Person Loan

How to Get a Person-to-Person Loan

Person to person (or peer-to-peer) lending is one the fastest-growing alternatives for accessing credit. Since 2006, over $1 billion in person to person loans have been issued in the U.S. to individuals seeking to consolidate debt, repair a car, pay for a wedding, or start a small business.

The new lending practice was borne out of social media technology, which enables prospective borrowers to create online profiles and get matched up with individual lenders. The two leading person to person lending companies are Lending Club and Prosper Marketplace.

What are the Benefits?

Low rates: If you qualify, the interest rates may be lower than what you can get from a bank or credit card. Borrowers with high credit scores on p2p platforms may be able to borrow for under 7%. Borrowers with lower credit scores, or with weaker credit histories will see higher rates.

• Easy approval process: The Prosper and Lending Club forms can be completed in less than five minutes. There is no paperwork or meetings involved. Your loan will be funded if enough investors are interested.

Qualifying is easier and more transparent than a bank loan: The lending platforms use their own models and criteria to approve a potential borrower. The approval criteria are explicitly stated on their sites (see more detail below).

No hidden fees: And the interest rates don’t change either.

Is it Easy to Qualify?

Good credit history is important. Borrowers need credit scores of at least 640 (on Prosper) and 660 (on Lending Club), with a debt-to-income ratio typically no greater than 30% (excluding mortgage). Borrowers also need at least three years of credit history, with a clean recent record (no delinquincies or bankruptcies). Visit the platform sites for more detailed criteria.

How Does it Work?

Borrowers can sign up for free. You can apply to borrow up to $25,000 on Prosper, and $35,000 on Lending Club, and get a rate quote after completing an application. The process will not count as a hard inquiry against your credit report, so it won’t count negatively on your credit history. Once your credit level is assessed, you’ll typically get to choose from a couple of different loans at different lengths (typically 36 or 60 months) and rates.

Loan Listing

Once approved, the loan is listed for investors to review. The loan stays listed for up to 14 days. If at least 60% of the loan amount is committed by investors, the amount is funded, as long as it exceeds $1,000. If not, the loan is taken down. Once the loan is funded, borrowers make monthly payments through the online platform, which are automatically deposited into the investors’ account.
If you qualify for a loan with a low credit grade, you’ll want to express yourself well to better attract investors wary of high risk.

Conclusion

The borrower experience overall is fairly straight-forward. You know quickly whether you qualify, and you know within 14 days if you’re funded. Not everyone can get a person to person loan. But if you can qualify, it sure beats paying those high rates on your credit cards.

To set up an account on Lending Club, click here.
To set up an account on Prosper, click here.

If your credit score is below 640, click here to qualify for a different loan.

What are the Borrowing Fees on a Peer-to-Peer Loan?

Peer to peer loans can be a lower-cost alternative to bank loans and credit cards. But make no mistake – fees still apply along with your interest payments. P2P lending platforms are for-profit businesses after all, so knowing the fees you pay will help you understand your true borrowing costs before you list your loan.

Origination Fees

The two main peer-to-peer lending sites – Lending Club and Prosper – charge no fees to apply for a loan. But both sites do charge an origination fee once you receive the loan. Your APR consists of your interest rate plus the origination fee, which is based on the deemed default risk of the borrower. Prosper and Lending Club apply their own criteria in determining an applicant’s default risk, which encompasses factors like credit score, loan amount, loan term (usually 36 or 60 month), loan purpose, and credit usage and history.

As of December, 2012, Prosper charged its top rated borrowers a .5% origination fee, its 2nd tier borrowers pay 3.95% and the lowest-tier pay 4.95%. Lending Club’s origination fees range between 1.1% to 5%.

So if you’re a high-risk borrower seeking a $15,000 small business loan, you may expect to pay on the order of $750 in origination fees. “High-risk” is a relative term, though, since both Prosper and Lending Club allow only borrowers with a good credit score – a minimum of 640 to 660 – to even list on their site. If you come out on the low-end, you could pay both a high interest rate – possibly over 20% – plus a higher fee to the p2p lending platform.

Additional Fees

Other, smaller fees may apply as well. Both P2P loan providers charge $15 for unsuccessful payments (checks bounce, bank funds not available, etc.). And late fees will kick in typically after a 15-day grace period. Late fees are typically the greater of 5% of the unpaid installment amount, or $15. Prosper and Lending Club don’t profit on the late fees, which are sent directly to the investors.

One of the nice things about Lending Club and Prosper is that they are up-front and transparent with the fees you could expect to pay up. When you’re approved to list your loan on the lending sites, you’ll know your APR. But if you’re looking for a sizable loan, and your credit score is not impeccable, expect to pay a little extra for your peer to peer loan.

6 Ways to Improve Your Credit Rating

Lenders view your credit score as a measure of your financial trustworthiness. They’re more likely to lend you money and charge you a lower interest rate if your score is high. P2P lending platforms require FICO scores of at least 640 to even apply for a loan. Once accepted by the platform, your credit score will be a major factor in determining your APR. So, it’s in your best interest to try to build the best credit rating you can. While you can’t raise your score overnight, you can improve it if you follow these steps:

1. Establish a credit history
For the best credit score possible, it’s important to establish a history of responsible borrowing. If you currently don’t have any credit history, you may want to consider applying for a card at a retail store you use for every day purchases, like a WalMart card, or a gasoline company credit card. Not only are these usually easy to obtain, but store and gas cards can be a great way to charge regular small purchases each month without being tempted to overspend.

2. Pay your bills on time
Late payments are often the single biggest factor in a low credit score. When you receive your credit card statements, utility bills and other payment notices, put them in a prominent place where you won’t forget about them. Or, better yet, arrange to have them automatically paid each month via direct debit from your bank account. If you do this, however, take care you maintain a sufficient bank balance to cover them so you don’t end up getting hit with charges for having insufficient funds.

3. Reduce your debt
Try to lower your credit card balances and lines of credit a few months before applying for a peer-to-peer loan. One of the important factors included in your credit score is the difference between the current balances and the available limits on your accounts. Try to keep the balances under 30 percent of their allowable limits.

4. Review your credit reports
You can request a free credit report from a service like FreeCreditScore.com, or contact each of the three bureaus (Experian, Equifax and TransUnion. Review your files at all three bureaus, and if you mistakes or missing information, contact the bureau to resolve the issue. Instructions for reporting errors are on each bureau’s Web site. It’s best to monitor your score regularly.

5. Confirm your good credit history has been reported
When you check your credit report, you may find there’s no record of a loan you successfully paid off or a credit account that you’ve kept current. If so, ask the lender to report this positive history to the credit bureaus or send a letter to the bureaus yourself, along with copies of the statements showing you’ve paid on time.

6. Don’t apply for, or cancel, accounts you don’t need
If your credit report shows you’ve applied for a lot of different kinds of credit in a short period of time, your credit score may drop, especially if you have a short credit history or few existing accounts. (However, multiple inquiries within 14 days for home and auto loans are counted only once.) That’s why it’s usually a bad idea to sign up for cards you’re not likely to use. If you have already opened a number of accounts, however, don’t rush to cancel them. Closing accounts, especially ones you’ve held for a long time, will reduce your available credit and may shorten your credit history, which can lead to a lower score.

How It Works

Applying for a bank loan can be intimidating, onerous, and expensive. Even after filling out lengthy applications, a loan official might still turn you down.

Peer-to-peer lending may provide an answer for some people. It uses the tools of social networks to match up borrowers and lenders directly, leaving out the traditional bank.. With the “middleman” removed, so are some of the costs. Borrowers can get lower APRs, while offering good returns for investors.

How it Works

A P2P lending site allows borrowers to create a profile online to tell potential lender investors about themselves and why they need a loan. The lenders may be individuals, or institutions, that want to earn interest from loan payments made by the borrower. Borrowers can use loans for whatever they choose – consolidating debt, remodeling a bathroom, or starting a small business – and can typically ask for anywhere between $2,000 and $25,000.

Peer to peer lending sites like Prosper and Lending Club determine the borrower’s APR and the interest rate for the lender, and simply handle the transaction between borrower and lender. The lender is able to examine the borrower’s credit history, and decide if the interest rate on the individual borrower’s loan is worth the investment.

Benefits to the Borrower

If a borrower has good credit, there are several reasons to look at P2P lending versus a bank or credit card:

(1) Lower interest rates
This means lower monthly payments and a lower total cost of borrowing. Borrowers with excellent credit can sometimes borrow for under 6.8%.

(2) Easier approval
Borrowers can qualify for smaller loans than most traditional banks are willing to make. In addition, many investors have higher risk thresholds than banks, and seek out certain higher-risk borrowers if they are seeking higher returns. Some investors may like something in the borrower’s profile – the type of business project he is working on, his alma mater, etc.- that a bank loan officer or credit card company’s approval algorithm would ignore.

(3) Quicker Process

(4) No paperwork. No meetings with loan officers.

How to Get Started

If you want to borrow money, simply create an account with Lending Club, Prosper, or your P2P lender of choice. You will be asked to fill out some basic information and give the service the right to pull your credit history so its lenders can evaluate your financial solvency. If you want to invest via P2P lending, it’s a similar process. You’ll need to create an account and tell the service a little about yourself.

To set up an account on Lending Club, click here.
To set up an account on Prosper, click here.