Benefits of Peer-to-Peer Loans & Investing: Getting Started

With the world economy in a volatile situation many are now exploring alternative ways to bolster their bottom line (or to have a bottom line at all). Some consumers will take out traditional loans from their banks while others may leverage their available credit on various credit cards.

Those with stock portfolios may liquidate or sell off stock in order to meet financial obligations. But what if none of those are an option for you? Peer to Peer lending, often referred to as P2P, is another way to get a loan from a bank. This is sometimes called social lending because it involves a platform where willing investors agree to fund your request. Learn how to qualify, what p2p lending is and the benefits of the p2p loan, especially for seniors looking to shore up a retirement account.

What is Peer-to-Peer Lending and How Does it Work?

Peer-to-Peer (P2P) lending is another way to get a loan from a banking institution with a few differences. First with P2P lending you must first qualify. Each banking institution has its own policies, but you should be aware that most of them require you to meet an account minimum. In addition to meeting account minimums you may also be required to be a business owner or have significant assets totaling in the hundreds of thousands (or millions!). Do not worry if your bank account is not in the six figure range however. Many P2P companies are open to everyone as long as the minimums are met.

When you put in your application to a P2P lending company you are matched with investors who are on a lending platform. These investors get to pick and choose which loans they will fund. Often the loans are personal loans or working capital loans for startup companies. These lenders get a return on their investment by charging interest rates and a small fee for lending you the money. Expect to pay around 1-6% of the total loan amount. Both the lending company and the investor make money by charging fees and receiving a payment each month (like on a regular loan).

How to Qualify for a Peer-To-Peer Loan

In general you must have a decent credit history if you want to keep the interest rates low. If you have at least a 630 or more then you most likely qualify. Be prepared to answer questions about your income as the lending institution will do a debt-to-income ratio. You will need a verifiable U.S. banking account and a social security number. You must be 18 years of age to apply for any of them and most lending institutions want you to reside in the state where they have a regional office. You can apply online for all of the lending institutions listed below but you must be prepared to scan and send your documents. Gather the following documents:

  • W-2 or 1099 forms.

  • Driver’s License or Government Issued ID (passport).

  • Pay Stubs.

  • Housing payment verification.

  • Tax returns for last 2 years.

Difference Between Peer Lending and the Stock Market

If you are interested in becoming the investor in the P2P market then there are some definite benefits and advantages over investment in the stock market. With the stock market you are not guaranteed a rate of return as it is tied to the index ratings. With P2P investment you know what the return will be each month as the borrower will make regular payments. The down side is that if the borrower defaults on the payments there is zero security and all you own is the collection of debts. Just like stocks you can sell a loan to another investor. However it is more difficult to sell or liquidate a P2P loan than it is to sell off a stock. Most investors own both P2P loans as well as stock in order to diversify assets. This way if one has a downturn the other can cover it.

Benefits of P2P Loans

When it comes to investing, P2P loans are often easier to understand than the stock market. That makes it very attractive to retirees who have some additional money they would like to put to work for them. You enjoy a larger return than you would simply putting your savings in an account at a bank. You have more control over whom you loan your money to and as a result there is a higher rate of satisfaction from investors. They get to know the people to whom they lend money. The forums for lending companies tend to be very active and it is a type of social media for those looking to invest or borrow. Often those with less than stellar credit scores are funded simply because they had a compelling story that an investor resonated with. In such cases the investor is willing to assume more of the risk than he or she ordinarily would.

Best Peer-to-Peer Lending Companies

The following companies have stellar reputations and are a mixture of those allowing anyone with a decent credit score to join the P2P platform to those who only fund businesses or refinance student loans.

LendingClub: The Lending Club offers qualified members to take out a personal loan which you can use for a variety of purposes. You can also invest with lending club with a particularly popular retirement account investment program. You can invest with as little as $1000. Borrowers can borrow up to $40,000 for personal loans and up to $500,000 for business loans. The application is online. 

Kiva: You can become a member-investor with as little as $25. Kiva boasts a 96% repayment rate from its borrowers. As a borrower you can borrow up to $15,000 with 0% interest because Kiva is a non-profit organization. It is a type of crowd funding platform.  

Prosper: You can borrow between $2,000 -$40,000 on this platform with loan terms of three to five years. You can see if you qualify online using the rate check feature. Investors experience historical returns of at least 5.3%. 

SoFi: This lending company focuses primarily on refinancing and consolidating student loan debt. The minimum amount to borrow is $5000 and you must be employed or have an offer of employment in order to qualify. 

ApplePie Capital: This company lends money to those who would like to open their own franchise business.  For business owners who wish to create a franchise and offer in-house financing, ApplePie offers to partner with you to make that happen.