The peer-to-peer lending industry (P2P) has moved at warp speed since inception in 2005, when the first peer-to-peer lender, Zopa, launched in the United Kingdom.
There are now more than 20 firms worldwide offering would-be borrowers solid alternatives to more traditional bank lenders and business loans. Some of these peer lenders specialize in school loans and micro lending, but the largest players — LendingClub and Prosper — will provide funding for any purpose.
Unlike traditional lenders, there are no penalties or higher interest rates to a borrower who wants to use funding for what some might consider more risky reasons like consolidation of debt or to pay off medical expenses.
Why has this industry grown at such a rapid rate? Put simply, it offers both borrowers and lenders significant efficiencies over the traditional banking model. For more history about P2P loans and how it works, see this infographic.
4 Reasons Borrowers Win in P2P Lending
Benefits to the borrower revolve around speed of the funding, reasonable interest rates, higher funding rates, and the ease of the application process.
- Easy Application
Put in a few pieces of personal information into an on-line application and you can be approved literally within minutes. Apply anywhere you have computer access and upon approval wait for you loan to fund.
- Interest Rates
The second benefit is the reasonable bank-like interest rates. As of this writing, the two largest P2P lenders quote rates of approximately 7% APR for their best customers. Approved borrowers will be offered several different payback timelines that range from one, three, or five years. The interest rate is accordingly adjusted up or down based on the term selected.
- Speed of Funding
Third, is the speed of funding. Funding typically takes one to three weeks depending on the size of your loan. We have seen small loans under $5,000 filled in just a few days and be funded in less than a week.
- Higher Funding Rates
Finally, the final benefit to the borrower in the peer-to-peer model is that funding amounts have risen over time, and now can be quite substantial ranging from $1,000 to $35,000. Obviously funding on the higher end of this spectrum can provide funding for a more meaningful project and or purchase.
3 Reasons Lenders Win in P2P Loans
Not all of the benefits apply to borrowers in the peer-to-peer lending model; lenders win by getting returns above market rates and spreading their risk through a variety of transactions.
- Spreading Risk
With P2P lending, lenders are not big institutions (yes there are some of these) but the majority of loans are filled in much smaller $25 or $50 increments by individuals like you and I. Investors are attracted to an alternative to the paltry interest rates provided through a traditional bank or looking or for an alternative to the stock market.
- High Returns
Current returns average near 10% depending on the loan type(s) you chose and the term. In today’s market, a 10% return is certainly very attractive; especially if it is diversified into large pools of FICO verified and pre-qualified borrowers.
- Lenders Choose
P2P lenders categorize the borrowers for the lenders in their network and ensure that they pass identity verification. Borrowers are provided interest rates and terms associated with the risk related to term of the loan, credit score, and other related factors in their funding algorithm. Lenders choose only to invest in the loans that they are interested in. If you don’t like someone that is consolidating credit card debt, don’t invest. Choose only to invest in the borrowers that match your preferences.
Peer to peer lending is a model that over the last half decade has proven it offers benefits to both the borrower and the lender.
With the tightening of traditional lending markets and spiraling economy in the last few years, P2P lenders have not just survived but thrived. Unaided by government bail outs, the largest P2P lenders have combined to loan almost half a billion dollars and provided loans to more than 63,000 individuals and business owners since their inception.
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