Veneta Lusk is a family finance expert and journalist. After becoming debt free, she made it her mission to empower people to get smart about their finances. Her writing and financial expertise have been featured in MSN Money, Debt.com, Yahoo! Finance, Go Banking Rates and The Penny Hoarder. She holds a degree in journalism from the University of North Carolina - Chapel Hill.
Today, borrowers have more options than a traditional bank loan or a payday loan. Alternate financing, such as peer-to-peer lending, can be a good choice for some. If you’re not sure what it is, how it works and if it can be a good option for you, read on for more details.
What is peer-to-peer lending?
Peer-to-peer lending, also referred to as P2P lending, is an online practice of connecting potential borrowers with investors looking to fund part of or whole loans. It’s an alternative to using traditional financing options such as banks, credit unions, credit cards, and payday lenders.
Borrowers looking for a loan can review the terms these lenders offer and determine if they get a better deal than through their banks. Some borrowers can’t qualify for loans through a bank, so a P2P lender is a suitable alternative.
Investors use peer-to-peer lending platforms to get higher returns than through a bank. They can decide how much risk they want to take on based on the potential return on their investment. P2P lending cuts out the middleman and allows an investor to fund all or part of a loan for a borrower.
Peer-to-peer lending can be a good alternative to payday loans, which often charge higher rates. Loan rates will depend on your credit history, income, and other factors.
Types of peer-to-peer loans
You can take out several types of loans using P2P lending platforms:
This is the most popular option on peer-to-peer lending platforms. Depending on the lender, you may have a choice between a secured loan and an unsecured loan. Secured loans require collateral, while unsecured ones do not. For example, auto loans are a type of secured loan that uses the car you buy as collateral. How much you can borrow and loan rates will vary depending on the lender and your credit history.
Some P2P platforms offer business loans to borrowers looking for start-up capital or to expand their business. This can be an alternative to traditional bank loans, with more favorable terms for lenders. It’s also a way for individuals to invest in a business.
Debt consolidation loans:
If you have debt you’d like to merge into a single fixed monthly payment, peer-to-peer loans can help you pay off credit cards with high interest rates or refinance other debt, helping you
For those who have trouble getting
through a dealership or a bank, P2P lending platforms offer an alternative. P2P lending may also help you pay for repairs to your vehicle when you don’t have the cash.
Home improvement loans:
can be pricey. Peer-to-peer lending platforms offer a way to borrow money and finance the work, then pay it off over the loan term.
How does peer-to-peer lending work?
For borrowers, the peer-to-peer lending process depends on each lender, but you can expect the following steps:
You will need to fill out an application, which will include personal information such as your name and address. A credit check may be required.
If approved, you will find be presented with an interest rate. Decide if this will work for you and review the length of your repayment term.
Once approved, your loan will be submitted to investors, who will review it and decide if they want to fund it.
If your loan funds successfully, you will receive the money and start making payments. Payments will be fixed over the life of the loan. Each payment will be divided up proportionally between the investors who funded your loan.
For investors, the P2P lending process may look similar to this:
Decide which peer-to-peer lending platform you want to use. Make sure you meet all requirements to become an investor, then create an account.
Review loan options and educate yourself on how the platforms determine loan risk.
Pick a loan or loans you’d like to fund and follow the platform’s steps for transferring funds from your banking institution.
Check in on the loans you funded and the earnings in your account.
Is peer-to-peer lending available in Canada?
While the P2P lending industry is not as well-established as it is in the U.S., it has increased in popularity over the last few years. Canadian regulators have given the green light to P2P lending companies, which opened up the space for an alternative to traditional lending routes.
This opened a door for a new way for borrowers to get funds and for investors to fund loans. Borrowers can complete an online application and get a decision back quickly, often within 24 hours. Loan terms will vary depending on factors such as credit history.
Top P2P lending platforms in Canada
There are two main players in the peer-to-peer lending space in Canada: Lending Loop and goPeer.
Lending Loop focuses on small business financing. And goPeer focuses on consumers—it’s the first peer-to-peer consumer-focused lending platform in Canada. Depending on your credit history, it may be a suitable alternative to traditional lenders. goPeer offers loans up to $25,000 with APR rates from 8%, loan terms between 36 and 60 months.
Lending Loop offers financing for business owners. Funds can be used to expand the business, purchase new equipment, expand staffing, purchase inventory, mark the business, and more. Loan amounts range from $1,000 to $500,000 with rates starting at 4.96%.
The minimum loan qualifications for Lending Loop are: The business must be at least one year old and generate $100,000 in revenue per year or more; and its owner must have a personal credit score of 640 or higher.
The entire application process can be completed online in minutes.
Other notable P2P platforms (globally)
Peer-to-peer lending has increased in popularity over the last decade. Below are some other notable P2P platforms that connect borrowers and investors. Note that these do not currently operate in Canada.
Since its inception in 2007, Lending Club has helped more than 3 million people. Lending Club offers personal loans of up to $40,000. Besides personal loans, Lending Club has partnered with Accion Opportunity Fund to offer business loans of up to $500,000 with fixed monthly payments and one- to five-year loan terms.
Founded in 2005, Prosper has facilitated more than $12 billion in loans. It offers personal loans with fixed rates and fixed terms running from $2,000 to $40,000.
Since it was founded in 2011, SoFi has funded more than $50 billion in loans. Unlike other fintech lending platforms, SoFi offers student loan refinancing for both public and private loans. In addition, it offers personal loans, home loans, and auto loan refinancing.
SoFi’s website states that there are no personal loan hidden fees, such as origination fees or pre-payment fees. This means your loan payments will go toward paying down your balance and covering interest rather than fees.
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