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Should You Borrow From a Peer to Peer Lender or a Bank?

Peer to Peer Lending

Banking

Should You Borrow From a Peer to Peer Lender or a Bank?

Up until 2007, one of your only options to get a personal loan with a reasonable interest rate was from a traditional brick-and-mortar bank. Now, you can choose between a peer to peer lender and a bank. What’s the difference between the two and which is better? Both options can lend you the money you need when you need it most, but, peer lending loans are different than bank loans.

What’s The Difference Between a Peer to Peer Lender and a Bank?

Since both institutions will lend money while charging interest, what’s the difference between a peer to peer (P2P) lender and a bank? There are several differences.

Personal Loans Only

Peer to Peer lenders only offer personal loans that must be repaid with three or five years. Some of the loan possibilities include:

  • Refinancing credit card debt
  • Consolidate debt
  • Home improvement loans
  • Vacation loans
  • Business loans

Banks also offer these types of personal loans with similar repayment terms. Peer lenders often have less stringent underwriting requirements meaning you might not have to submit a business plan to qualify for a business loan. For personal loans, peer lenders only request a soft inquiry that won’t impact your credit, but each payment will be reported to the credit bureaus and missed payments will negatively affect your score, just like a bank loan.

Borrowing Limits

Peer loans also have relatively small borrowing limits. Most P2P platforms will only let you borrow between $30,000 and $50,000 at most. These small borrowing limits mean you will need to go to a bank if you want a mortgage because most houses cost more than $50,000 and require more than five years to repay.

Payments Go Directly to the Individual Investor

With peer to peer loans, your monthly payments go directly to those that invest in peer to peer loans. If enough investors do not fund your loan request, you will only receive a partial amount of the total funds you requested. With on-time payments, investors might be willing to contribute more money if your loan was not 100% fulfilled in the beginning. Unlike banks that use your monthly payment to pay for their monthly bills and then pass the remaining earnings onto the individual bank customers in the form of an interest payment, P2P investors are essential “the bank” and get most of the profit.

Peer lenders cannot hold any of your possessions as “collateral” if you fail to make a payment. Since they want to ensure they get their money back, they want to only invest in reliable applicants. If you have an unproven lending history, not as many lenders will be willing to lend you the full amount requested. Also, investors are only required to invest in $25 increments for most loans. Even though you only make one monthly payment, it can literally be divided and going to hundreds or thousands of individual investors.

Peer to Peer Lenders Have More Lenient Underwriting

Peer lenders have more lenient underwriting standards. Looser standards can be a good thing if you have poor credit or a minimal credit history. Banks might perceive you as being too risky but you can get a second chance with a peer to peer lending service. The tradeoff can be a smaller loan amount or a slightly higher interest rate, but, some credit can be better than no credit. And, a peer to peer loans is still a much better alternative to payday loans.

Overall, peer to peer loan interest rates are very competitive with bank interest rates despite the different underwriting standards. Sometimes, peer loan rates can be lower while other times they are higher, especially if you have a low credit score.

Some Peer to Peer Lenders Don’t Lend In Certain States

Because peer to peer loans are different than a traditional bank loan, some states prohibit peer to peer lending.

The Best Times to Apply for a Peer-to-Peer Loan

Peer to peer loans can be a better option when you meet one of the following conditions:

  • Don’t want a “hard inquiry” loan application on your credit report
  • Have poor or no credit
  • Are self-employed and a bank won’t approve your loan request despite having good credit
  • Peer to peer loan has a lower interest rate or smaller fees
  • Have to borrow less than $50,000 and can repay within five years

The two primary reasons to borrow from a peer to peer lender is when you don’t think you will qualify for a bank loan and if the interest rates are lower than a similar bank loan.

These are a few loans you should consider making with a peer to peer lender:

  • Credit card debt refinancing
  • Debt Consolidation
  • Auto loan refinancing
  • Medical debt
  • Business loan

Your chances of approval will be higher with loan reasons mentioned above. Remember, investors are looking to earn a consistent return and assume you will be more likely to repay the balance with these types of loans as opposed to a vacation loan or a boat loan.

The Best Times to Apply for a Bank Loan

Here’s why you might choose to apply for a bank loan instead:

  • No origination fees
  • Lower interest rates
  • Have an established relationship with the bank
  • Need more than five years to repay the balance

Personal loans from the bank can have lower fees and interest rates. Most P2P loans have an origination fee of 1% to 5%. Some banks and credit unions will waive that fee for qualified applicants.

As with any loan, you need to compare rates before you apply. Interest rates can vary by a point or two even within your own hometown banks and credit unions depending on their current specials and lending rates. The same thing can be said for the peer to peer lending platforms too.

You may also decide to remain with your bank if you already have a relationship with them. If you are already pre-qualified, it can be less hassle applying for a loan in-person instead of on the internet. There still is something to be said for local customer service.

Bank loans can also be a good option for credit card refinancing, debt consolidation, and business loans. You might have to furnish more information to prove your creditworthiness, but, the extra requirements can mean a lower interest rate or monthly payments which can mean the difference between being able to afford a loan payment and getting charged a late fee.

The Best Peer to Peer Lending Platforms

The two largest peer lending platforms are Lending Club and Prosper, respectively. You will have the most success with getting your loan request funded at these two companies.

Young professionals may also want to try Upstart . It’s a relatively new platform that began originating loans in 2014 and was founded by several ex-Google employees.

One final recommendation if you have student loans or a home mortgage to refinance is SoFi.  Maybe you’ve seen their commercials during the Super Bowl or other major events throughout the year.

Summary

Peer to peer is lending has only been mainstream for about a decade. While it’s still relatively new, it’s definitely a great way to borrow money as there are plenty of investors that want to earn a higher yield than a traditional CD or bond investment without the volatility of stocks to chase yield. Borrowing costs are very competitive with banks and in some instance are better depending on your credit score.

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