Best Peer to Peer Lending
Based on In-Depth Reviews

A Brief Introduction to Peer to Peer Lending 

Peer to peer lending (P2P), also known as social lending and crowdlending, is a relatively new way of lending money without financial institutions as mediators. The oldest P2P lending platform in the United States has only been on the market since 2005, but the industry as a whole received a large boost after the 2008 financial crisis, when banks refused to increase their loan portfolios and lowered interest yields. Like many other online services, the P2P lending industry is the result of new consumer demands—in this case, for quick loan approvals and competitive interest rates. 

P2P online platforms or services lend money to individuals or businesses by matching lenders with potential borrowers. In most cases, due to the fact that P2P companies operate online, they have lower operating expenses than traditional financial institutions, which ultimately benefits consumers who are supposed to see these savings as more competitive interest rates. 

The process can be very simple: potential borrowers enter the platform, fill out some basic required information, and this is in turn provided to lenders, who decide whether or not they want to contribute to the loan. Multiple investors fund small parts or buy fractions of the loan until its total is fully funded. In this sense, P2P lending resembles crowdfunding, which is why it’s also known as crowdlending. The platform works as a type of intermediary between borrower and lender, and is responsible for setting rates and terms, enabling the transaction, collecting payments and redistributing repayments to lenders. 

Usually, P2P platforms allow consumers to easily check their rates in just minutes, without an impact on their credit score. This gives borrowers the opportunity to check their options on multiple platforms before accepting an offer. Nonetheless, they should remember that once a loan application is submitted, lenders will do a hard inquiry before approving, which will definitely affect credit score.

Since the P2P lending industry has two distinct groups of consumers—borrowers and investors—we’ve focused on providing separate information for both potential consumers. 

Borrowers:

How does it work for a borrower?

Just like with traditional financial institutions, peer to peer lending platforms have a standardized application process. Usually, the process takes between 10-20 minutes, after which prospective borrowers have an answer on whether or not the loan was accepted. Depending on the platform, the process for applying for loans usually goes as follows: 

• Check your rate and fill out the application fully— while the required documents can vary between companies, they’ll typically ask for basic personal information: birthdate, income, loan amount and purpose, street address, verifiable bank account. As we said before, most P2P platforms will let you check your rates without affecting your credit just from submitting this basic information. After checking your rate you’ll be presented with multiple loan offers if you qualify. Each offer should show the loan amount, interest rate, APR, monthly payment, and loan term. To apply you must be at least 18 years old and a U.S. citizen or resident. Availability for the loan, however, will depend on whether the peer to peer company is allowed to operate in your state, which you’ll be notified of early in the process. For instance, at least three P2P platforms aren’t available in Iowa (Prosper, Upstart, Lending Club). 

• Verify the terms and rates — before submitting your application make sure to carefully read the loan’s terms and rates. Most P2P platforms offer APRs that can range between 6% to 36%—your rate, as with traditional financial institutions, will depend on your creditworthiness. You should also know that most P2P lending platforms charge an origination fee of 1% to 6% that gets deducted from your loan total. So if you get approved for a $6,000 loan and get charged a 5% origination fee (equal to $300), the final amount you’ll receive in your bank account will be $5,700. As for repayment terms, these generally range between 3-5 years.     

Other than the origination fee, these are some other fees you should be aware of: 

• Loan is funded — once a loan is reviewed and approved, P2P lending platforms will send credit rate information and loan terms to the investors. This is the part where different investors will crowdfund the loan by buying fractions of it. The funding process will vary depending on the platforms. Some P2P offers next-day funding and deposits, in other cases, it may take up to two weeks. 

• Repay loan with interest — usually, P2P lending platforms offer fixed-rates loans which mean borrowers have a fixed monthly payment that should never change. Most of them don’t have prepayment penalties, which gives borrowers the opportunity to repay their loans before the stipulated term.    

When should I consider P2P?

Peer to peer lending may offer a lot of advantages for borrowers looking for an alternative outside of the traditional financial system. For starters, P2P platforms make borrowing easier and quicker: there is no bank mediating, paperwork is significantly reduced, and consumers receive fast answers. Moreover, because P2P lending is principally done through online platforms and they, therefore, have lower overhead costs than traditional financial institutions with multiple branches and personnel per city, this translates into lower interest rates. Consequently, P2P could be a better option for borrowers who meet certain criteria, for instance, borrowers who are looking to improve their scores through debt consolidation. 

Like traditional banks, P2P platforms offer lower interest rates to borrowers with an excellent credit history. In fact, most P2P prefer borrowers with a credit score of 600+ points, although some are willing to take riskier borrowers with lower scores. Across most P2P platforms, creditworthiness is frequently graded using letters—e.g. A to G—that help divide borrowers based on their risk profile and let investors know the probability of default. In this scenario, borrowers with better credit scores will likely benefit more from a P2P personal loan than those with not-so-good scores who would likely receive high-interest rates offers. It’s also possible that borrowers with a good credit score may find competitive low-interest rates in traditional financial institutions.   

A major motivator for getting a loan through a P2P lending platform could be their quick processing times and the wide variety of loans on offer, which may include personal loans, debt consolidation loans, home improvement loans, medical loans, wedding loans, and car financing. In fact, debt consolidation seems to be the main reason for borrowers to apply for a P2P loan. According to the numbers Lending Club reported in September 2019, 68.16% of borrowers claimed to use their borrowed funds for either refinancing existing loans or paying off credit cards. A loan of this type can be helpful for someone who has accrued multiple credit card debts at a high-interest rate and wants to benefit from a fixed monthly payment with a lower interest rate. If this were the case, remember that P2P lenders charge an origination fee which will be deducted from the loan total and that not all of them pay directly to your creditors, but rather deposit the amount in your authorized bank account, letting you manage the relevant payments.  

Peer to peer lending for small businesses?

Some peer to peer lenders include small business loans among their offerings, while others specialize in this type of loan. The goal is to provide small business owners a quick financing option. Most platforms offer what we call short and intermediate-term loans from $5,000 to $500,000 dollars with a repayment period of 1-5 years—sometimes even 3 months, depending on the loan total. Funds can be used for debt consolidation, inventory or equipment purchase, working capital, remodeling, emergency repairs, and other business-specific matters. 

The requirements for applying will vary by lender. However, most P2P platforms will ask for at least a fair credit score  (600+) for both owner and business, that the business has been operating for at least 1 year, and that no recent bankruptcies or tax liens are on their record. Among the documents owners have to submit are total debts, payment history, annual revenue, and evidence of the percentage owned of the business. 

The application process is the same as for personal loans. Owners fill out their application, and the lender platform reviews it and determines creditworthiness, credit rating and the rate that applies to the loan. Once loan terms are accepted, investors review the request and decide if they want to fund and how much. Some platforms promise that, if any additional documentation is required, they will review it and send a final decision in as little as 24 hours. As for the funding process, it can take from 1 to 14 days.  

Small business loans have similar fees. Most lenders charge between a 4% to 8% origination fee, which is deducted from the loan total before depositing the funds in the authorized bank account. Other common fees are unsuccessful payment fees and late payment fees. The interest rate for term loans can fluctuate between 7% and 30%, with annual percentage rates of 10% to 36%. Most also promise no prepayment fee, giving owners the opportunity to pay off their loans before the established term and only be charged interest on the time borrowed. 

This type of loan can be secured and unsecured. Secured loans require that the borrower put up something of value as a security (or collateral) for the loan; if the borrower fails to pay back the loan, the lender can lay a claim on the collateral. Some lenders don’t ask for collateral for loans under $100,000 dollars, while others prefer to secure loans with non-real estate collateral, although that really depends on the lender. 

When is P2P not a good idea?

Before taking out a P2P loan—or any type of new debt—there are some things you should ask yourself.

• How long will it take you to pay it back? It seems obvious, but make sure you’re clear on how long and how deeply this decision will impact your budget, and whether you can afford that monthly payment given your other debt. 

• Can you save up for what you want instead? If you’re taking out a loan because you want to go on vacation and your credit cards are past their limit, consider whether you can hold off and start saving up for that trip instead. Paying cash is always preferable, as it’ll save you hundreds or even thousands of dollars on interest and fees. 

• If you’re using this to consolidate other debt, are you sure you’re paying a lower interest rate than with your existing loans? While many people assume that they’ll pay lower interest on a personal loan than on a credit card, if you’re using a loan to consolidate multiple cards, you should calculate exactly what you’re spending on interest now and compare how much you’d pay on interest with your P2P loan. 

• If you use it to consolidate your cards, how will you ensure that you don’t use the cards again? After consolidating your debt with a P2P (or any other type of loan), you should make sure to eliminate the possibility of using the cards again, or you risk ending up with even more debt than you had. However, it’s important to note that closing your credit card accounts can sometimes impact your credit score negatively, and most experts recommend keeping at least some credit lines open. 

Borrowers with insufficient or poor credit tend to be rated as high risk and ultimately get higher interest rates, which can go up to 36%. If that’s the case, our recommendation is for you to check your rate with different lenders before applying and accepting a loan offer. Most platforms allow you to check your rate without affecting your credit score. 

Another good idea is for you to check if there are mistakes in your credit report. In 2015, the Federal Trade Commission (FTC) showed that 26% of consumers surveyed on a credit report accuracy study reported at least one mistake on their credit report. This credit report review checklist can help you along the process. 

Investors:

How does P2P work for investors? 

The investing side of peer to peer lending gives accredited and retail investors the opportunity to browse loans based on term and credit characteristics, and purchase fractions or complete loans using the platform’s marketplace. Accredited investors are those that are allowed to deal or invest in securities that are not secured by financial institutions and have a net worth exceeding $1 million, while individual or retail investors are non-professional market participants who invest smaller amounts. 

The loan fractions or securities sold on P2P entities are known as notes. These can be purchased with a minimum amount of investment per note. The minimum across most platforms is $25 dollars. However, it can be higher, as is the case with Upstart and Funding Circle, who respectively ask for a minimum of $100 and $500 dollars per note. 

Prior to posting a loan on their marketplace, P2P platforms establish the terms for each loan request with the borrower. They assign the interest rate and grade the loan with a letter that indicates the risk level associated with the loan. 

For each listing, investors have access to the loan’s terms and to the borrower’s credit profile data, though their name and contact information are kept confidential and they’re only available for the company’s use. Investors only see the number assigned to the particular loan. Considering the data provided to them, they can build their portfolios by deciding which loans they want to purchase notes from and how much. 

Investors can build a diversified portfolio using filters to customize their investment criteria. In fact, due to the risky and speculative nature of these investments, P2P companies encourage investors to follow this strategy, because it is the best way of reducing investment loss. With a portfolio spread across all grades—low and high-risk loans—investors are likely to receive returns while minimizing their losses. When we spoke to Gerri Walsh, Senior Vice President of the Investor Education at the Financial Industry Regulatory Authority (FINRA), she agreed that “diversification can help mitigate risks.” However, she also added that “it can often be difficult to diversify P2P loans because [investors] might only be able to invest in certain types of loans.”

P2P platforms also offer automated investing tools, a service that automatically invests available cash in notes following investor-specified criteria without additional fees. 

One of the most attractive aspects of P2P is that they often offer higher yields than savings or CD accounts. Most companies claim average returns between 5% and 8%, minus a 1% service fee. They also promise investors monthly cash flow and returns. As borrowers make their monthly payments on their loans, investors receive monthly returns proportional to their share. They also receive proceeds from late fees and penalties if a borrower doesn’t pay on time. 

About these returns and fees, Walsh told us that “often the notes pay interest rates that might be higher, for example, than a CD or a money market mutual fund. [They] might even be higher than other types of available investments”. But one thing to keep in mind is that returns will depend on which types of loans you invest. As Walsh reminded us, “the higher the interest rate [of a borrower’s loan], the higher the risk of default”. 

What are the requirements to start investing in P2P?

Requirements for investing in peer to peer lending platforms vary depending on the company and the state of residence. For starters, some P2P notes are available to individual or retail investors, whereas others are specifically for accredited investors. Whichever the case, there are minimum requirements that investors interested in registering must meet.  

Investing in Businesses

Investors who feel skeptical or dubious about investing in individual loan notes may see the opportunity of purchasing small business loan notes as a less risky approach. However, this option is not necessarily safer, even though P2P platforms offering this type of loan require more documentation from potential borrowers. For example, lenders like Funding Circle offer secured loans only to businesses that have been in operation for a minimum of two years and require that owners meet specific FICO score criteria. Owners must also submit evidence of business and personal tax returns from previous years, and at least six bank statements before the loan is approved. 

Although this differs from most personal loan lenders who do not necessarily do an income verification of the borrower before approving the loan, the risk of default is ever-present. Walsh reminded us that “whether it is an individual or a small business, there are a variety of factors that go into whether that individual or small business might default: if they are located in an earthquake zone or a hurricane zone and the small business is impacted or if they lose supply chain, or if they lose distribution channels for whatever products they have. Companies go out of business all the time for a variety of reasons. Often, reasons that aren’t the fault of the individual or the company.”  In other words, things can happen that can drive a business to default on a loan, and many of them are not credit-related. Investing, even on financially solid companies, always involves risk. 

What are the risks to investors?

Peer to peer investments can be highly unpredictable and speculative. While lending money always carries a certain level of risk, there’s an even higher level of uncertainty involved in P2P lending. 

The principal risk for investors in the P2P market is no different than for other lenders—mainly, the possibility of borrowers defaulting. However, according to some reports, the default rate in the P2P industry might be considerably higher than in the traditional banking and the credit card industries. If this happens, the fact is that you can lose money and might not have any recourse. Gerri Walsh told us, “it really depends on the protocols of the platform, wherever the note itself is. You stand to lose your money or have negative returns when you’re investing in these kinds of notes.”  

The truth is that there are multiple factors inherent to the nature of P2P platforms that can contribute to a loan note’s default. For starters, these platforms do not necessarily verify borrower income or employment thoroughly, and although they sometimes may do so, it is their prerogative and you cannot ask the company to do income verification. Another thing to be mindful of is that some P2P platforms have a maximum debt-to-income ratio of 50%, (which is higher than what many lenders would allow), and the higher the debt-to-income ratio, the greater the risk of default. 

Ultimately, the P2P note’s market is still a novelty, and it’s virtually impossible to know what would happen if we were to face another economic crisis. As Walsh pointed out “P2P notes are relatively untested. They came into being after the financial crisis of 2008 and 2009 as a way for individuals and small companies to get access to credit at a time when credit was quite tight. But we really haven’t seen a major economic downturn. Instead, the economy in the US has been recovering, so we really don’t know what would happen if there were to be an economic downturn in the future, what would happen to the notes, what would happen to the platforms.”