Peer-To-Peer lending is an alternative method of investing and borrowing. The average investor is willing to lend on P2P platforms because the yields are attractive and there is potential for high returns. Borrowers that want a loan provide their personal information to receive offers on the rate and loan term. A background check takes place with a rating scale of the borrowers default risk. The higher the interest rate the higher the borrowers risk. The average lending interest rate is close to 14%. If investor(s) accept the loan they receive a portion of the borrower’s fixed monthly payments. The approval process for a loan can take as little as 3 days and loans are given to borrowers with a credit score under 680. The minimum credit score required is around 630. Borrowers that use P2P lending need the extra money for debt consolidation loans, credit card payoffs, to start a business, or for home improvement.
Peer-to-peer lending’s biggest strength the quick application process is also considered a great weakness. Any loan application process that takes 3 days or less means there is less security and scrutiny the strengths of traditional banks. There are lower levels of personal guarantees which can lead to a higher chance of borrowers defaulting on their loans. Investor’s funds may not get matched quickly because loans depend on borrowers needs at the particular time. Several days can pass by with your funds not earning any interest. P2P lending is also relatively new which means P2P sites can get shut down without much warning. If you are a potential borrower the application process will decrease your credit score in the short term. Not all states allow P2P lending.
Returns offered by P2P websites are higher than savings accounts and CDs. Since April 1, 2014 it has been regulated by the Financial Conduct Authority (FCA). Diversification is the most important strategy for any investor when lending funds. P2P sites provide risk investment tools to help meet your personal needs. Provision funds are now more apparent incase borrowers default, lenders will get compensated. The funds are managed by third parties to eliminate any conflict of interest. The highest rated P2P lending sites are LendingClub (https://www.lendingclub.com/), Prosper (https://www.prosper.com/), Funding Circle (https://www.fundingcircle.com/us/), and Upstart (https://www.upstart.com/).