If you’re in need of money, the traditional route would be to head down to the bank and apply for a loan or appeal to a family member and ask them for a loan. Banks are increasingly being pressured to raise their capital levels and are giving out fewer loans as a result, making that route more difficult than it used to be. Many banks have raised their interest rates and tightened the requirements for borrowers.
Borrowing money from family members is equally undesirable. Typically loans to friends and family members are handshake agreements and the money is rarely paid on time and in full. Borrowing money from friends and family will often result in a damaged relationship and is probably best to be avoided if there’s another option to get a loan.
Although getting a loan from friends and family or from a bank is becoming increasingly difficult and less desirable, there is another option available for would be borrowers, peer-to-peer loans. If you’re in need of money, you can borrow money through peer-to-peer lending marketplaces including Lending Club or Prosper Marketplace in the United States or from similar companies world wide.
The premise of peer-to-peer lending is to remove banks from the lending cycle. Traditionally, banks will collect money from their account holders (savers) and then loan that money out at higher interest rates to its borrowers. Lending Club and Prosper Marketplace aim to cut out banks by allowing savers to loan money to borrowers without a bank or credit union serving as the middle man. The benefit is that borrowers will generally get better interest rates than they would be able to at a local bank and savers (lenders) would be able to earn a better rate of return than if they had left their money in a savings account.
Requirements for Borrowers
One of the primary factors that peer-to-peer lending companies use to determine whether or not you will be approved for a loan is your credit score. Typically the minimum credit score that you would need to get a peer-to-peer loan is 660. If your credit score is at least 660, you will probably be able to get an unsecured loan from a peer-to-peer lending marketplace.
If you’re not sure what your credit score is or if there’s any red marks on your credit report that might need to be fixed to raise your credit score, there are two free sites that will let you review your credit report and score, which are Quizzle.com and CreditKarma.com.
Both Lending Club and Prosper Marketplace have slightly different requirements to determine who will qualify for a loan and who won’t. For example, on Lending Club requires its borrowers to have a 3 year credit history, no active delinquencies and no previous bankruptcies and Prosper Marketplace only requires borrowers to have credit scores of 640, whereas most of its competitors require a 660 credit score.
Types of Loans Available
The loans available from Prosper Marketplace and Lending Club are unsecured loans, meaning that you do not have to put up any collateral to guarantee to the loan. The term of the loans offered on Lending Club and Prosper Marketplace are both for 3 years (36 months). The loans fully amortize over that term, so you will repay the loan in 36 equal payments that total the principal amount that you have borrowed plus the interest. The interest rate you pay will vary between 8% and 20% depending on your credit score.
There are also student loan specific websites that aim to provide students with peer-to-peer loans to pay for their education. The two companies offering student loans are Fynanz and People Capital.
Applying for a Loan
If you are interested in applying for a peer-to-peer loan, visit Lending Club’s website at LendingClub.com or Prosper Marketplace’s website at Prosper.com. It’s important to remember that peer-to-peer loans are only available in certain states because lending laws vary from state-to-state. Both Prosper Marketplace and Lending Club will tell you if your state is eligible when you begin the application process.
Here’s how to sign-up with Lending Club:
(1) Visit this link to sign-up as a borrower or as a lender
(2) To apply for a loan, click on the “Get a Loan” link on Lending Club’s website. Fill out the simple form indicating how much money you want to borrow, what you want to borrow it for and how good your credit score is, then click the “Next” button.
(3) Next, fill out the relevant information in the fields required such as your name, address, phone number, social security number, your employment status and your email address. The website will also ask for information about your income and permission to pull a copy of your credit report.
(4) After filling out Lending Club’s three-minute form, you will be given a loan offer with the details of the loan. If the offer is to your liking, then you will need to enter in a checking account number and routing number so that Lending Club can deposit the money into your account.
(5) The loan money will be deposited into your account on a specific date. You will have to wait until the loan is completely funded by lenders on the website before receiving the deposit. After the loan is funded, the money will be automatically put into your checking account. An origination fee will be charged when putting into your account based on your credit score and the loan amount. This fee typically ranges between 1.25% and 3.75%.
(6) After receiving your money, Lending Club will deduct payments from your checking account for 36 months. There’s no penalty if you want to make extra payments or pay off your loan early. There are also no hidden fees to speak of.
Final Thoughts
Borrowers on Prosper Marketplace and Lending Club end up borrowing money for a variety of purposes, including purchasing a car, consolidating debt, getting additional money for college and even to pay for medical bills. Peer-to-peer lending companies provide a valuable service to both investors and borrowers by providing lenders above average interest rates and for giving borrowers better rates than they would be able to get from a bank.
If you haven’t tried peer-to-peer lending on either the borrowers or investors side, it might be worth a shot. You can make a decent rate of return that is less volatile than a stock market investment as a lender or get a great deal on an unsecured loan as a borrower.
