P2P Lending

Posted by on Jan 22, 2008 in Alternatives

P2P Lending

P2P (peer-to-peer) lending services, which facilitate unsecured personal loans between individuals, make excellent payday loan alternatives.

Also known as “person-to-person” lending, these online services cut bankers out of the loan equation giving borrowers competitive interest rates between about 7% and 18% APR. Also, since professional lenders are involved in the process, you can avoid the pitfalls of borrowing from family and friends.

Let’s take a look at the benefits, eligibility requirements and borrowing strategies of P2P loans…

Although the terms vary between different P2P loan service companies, the benefits of P2P loans generally include include:

  • relatively low interest rates compared to payday loans and credit cards (popular P2P services offer 7.12% to 18.36% APR depending on your credit rating and the P2P loan service)
  • no prepayment penalty (may vary with service provider)
  • no origination fees or annual service fees (no fees in the case of Zopa USA only – other service providers may include a 0.75-3% fee in addition to the interest rate)
  • people helping people (the interest you pay helps ordinary people, not banks)

In order to reap these benefits, you must meet certain eligibility requirements which may include:

  • reside in one of the states where the service is licensed as a lender
  • be at least 18 years old
  • a valid bank account
  • a valid Social Security number
  • a FICO score of at least 640
  • a debt-to-income ratio of no more than 25% (excluding mortgage)

Note: Eligibility requirements may vary but you should always try to maintain a decent FICO score and a low debt-to-income ratio.

Borrowing strategies for P2P loans include:

  • borrow responsibly (P2P loan services report to the major credit bureaus)
  • pay back on time (they hire collection agencies)
  • consider the fees (some have fees ranging from 0.75% to 3% of the loan balance)
  • consider one-time service fees (Virgin charges an expensive one-time fee depending on the level of service)
  • watch your FICO score and debt-to-income ratio (P2P loan services have minimum requirements for creditworthiness)
  • be honest (never understate debt or overstate ability to repay)
  • tell your story (lenders want to know why you need the money and how you plan to repay)

P2P lending services, which can be cheaper than credit unions, are one of the best payday loan alternatives.

Online-Payday-Loans.org lists three P2P lending services: Lending Club, Zopa USA and Virgin Money (which received negative feedback from some of our readers). There is another P2P lending service but for various reasons we decided it would be better not to review or link to them.

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