Peer-to-Peer Lending: Ideal Solution For Those With Bad Credit?

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In the personal loan industry, new start-up companies have disrupted lending practices. There’s now more option for peer-to-peer lending.

To get one of these loans, you don’t actually have to meet or even know those you’re getting the loan from.

These lenders will connect individuals that need a loan with others that are looking for investments.

Here’s how all of this works.

Brief History

In the past, if you needed a loan, you simply went to the bank and asked for one. You filled out the paperwork and waited for the underwriting to go through the process. It could sometimes take a lot of time and you were never guaranteed anything. With peer-to-peer lending you can be approved for a loan within a few hours or a few days.

How Peer-to-Peer Loans Work

All you need to do to get a peer-to-peer loan is to find a site that does this sort of lending. You’ll enter some personal details which will include your name and the amount of loan that you’re looking for.

You will have to share your savings levels and the amount of income that you make. In some cases, you’ll need to go through a credit check and share your Social Security number, but this will vary depending upon the lender you’re working with. The lending company won’t share your personal information with the “peer” who will take on your loan.

On some sites you’ll need to explain the nature of the loan that you’re looking for. The sites are looking for personal stories and what the individual will do with the money given to them. If you need a loan for a new course you want to take or for a small business, you should mention this as it may help you.

If you’re looking to pay off some credit card debt, you should try a peer-to-peer site that’s not looking for you to pitch why you need the loan to them.

Advantages of Peer-to-Peer Loans

There are a couple of advantages with this type of loan. The most obvious advantage is that a peer-to-peer loan is much easier to get than a regular bank loan is. T

he second advantage is that there are low interest rates for customer that have credit risk which is comparable.

If you’re a college grad for example, a peer-to-peer site is going to make it easier to get a loan than a bank would make it for you even though you probably have a thin credit history.

The interest rate will still be lower than what the bank would offer. If you have good credit history, you’ll end up with low interest rates which will be better than the rates you can get with your regular bank.

These peer-to-peer lenders also have a lot less overhead to deal with. They can take risks on applicants with poor or lower than normal credit. These sites can serve customers that find it impossible to get a loan at a bank

Your Credit and Peer-to Peer Loans

Some of the peer-to-peer sites specialize in loans for those that have average or above average credit. Some of them provide loans for those will poor or nonexistent credit, but the interest rate in higher to work with them.

For those will poor credit or credit problems, these peer-to-peer sites may be the only way that you can get the loan.

These loans are still better than a very expensive payday loan or installment loan. You’ll be able to rebuild your credit this way; just don’t apply for a loan you can’t afford to pay back or you’re going to be back at square one.

Some of the peer-to-peer sites don’t report your loan payments to the credit agencies so you need to shop around to find a site that will do this if you need to rebuild credit.

This will help rebuild your credit rating so you can actually work with banks if you need to in the future. The peer-to-peer sites may do a credit check, but it won’t be one that will harm your credit rating.

Fees and What to Keep in Mind

There can be fees with these loans so you have to compare. It more than just the interest rate you have to be aware of.

There may be flat percentage fees that come with your loan. These may be called closing fees or origination fees. They can range about 1-5% of the amount of your loan.

Other Things to Keep in Mind

Peer-to peer lending sites are still quite new, but they have a lot of options. Some of the well-known ones are Upstart, Prosper,and Lending Club.

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Some of them work like a charity does. They will form lending circles and help people out that need a personal loan so you don’t have to resort to payday loans or expensive installment loans.

The groups don’t charge much or even anything for the loans that they offer you. Some sites may charge more than the non-profit lenders, but it’s still less than the rates you get with your bank.

Some of the sites may ask you more questions such as where you went to school or what your high school GPA was. You need to answer all the questions honestly in your application

Peer-to-Peer is Big Business

It has become big business in the peer-to-peer work of lending so this can work in your favor. Investors such as big hedge fund companies will build up a portfolio of loans and they offer loans with lower rates and risk for you. Those that have bad credit can work with these lenders to get the money that they seek.

Conclusion

If you’re in the market for a loan and don’t want to work with the bank or have a poor credit rating which prevents you from getting a loan, then peer-to-peer lending can work for you.

One thing you must do is to shop around to get a good rate and know exactly what you’re getting with the loan. Watch for hidden fees or prepayment penalties.

Make sure you have a budget and can actually pay back the loan that you get. The loan should help you and not hinder you so don’t put it before expenses that are more important than the loan like rent, food, or other necessities.

Once you get the loan, spend it in wise manner and make your payments on time which is just smart financial advice to keep in mind.

Sources and citations

https://www.cafecredit.com/free-credit-score/
http://www.theatlantic.com/magazine/archive/2014/09/bypassing-the-bankers/375068/

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