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.