You might have noticed that banks aren’t lending as readily as they used to. The recent credit crisis and economic recession made it difficult to get an unsecured personal loan from your bank — even for a secured loan like a HELOC. The difficulty associated with obtain loans through traditional banks has contributed to an increasing interest in using peer-to-peer (P2P) lending. Whether you are consolidating credit card debt, paying for education, making home improvement, or funding your home business; it is worth looking into places like Lending Club and Prosper, where you can get an unsecured personal loan of up to $35,000 from other people like you and I.
Photo from Kevin Dooley via Flickr
Advantages of P2P Loans
Even if you have a good credit, it can be difficult to obtain a loan from a traditional bank. P2P loan rates are relatively low and the application process is fairly easy. You will have to go through a credit check, of course, but you won’t be subject to the onerous paperwork that comes with a HELOC application, and with some other applications.
You can get fairly flexible terms when you use P2P lending for your financing needs. For example, Lending Club will allow you to borrow up to $35,000, and you can repay the loan over three years or five years, depending on how much you borrow and your credit score. Your interest rate is locked in, so you don’t have to worry about the variability that comes with some types of loans. This provides you with flexibility that you might not get elsewhere. Indeed, many banks aren’t known for making unsecured loans so large, so P2P lending can be a real help if you are borrowing a significant amount of money.
When comparing P2P loans to payday loans and to credit card cash advances, the difference is even more astounding. Interest rates on payday loans and cash advances are huge, and they can cost you more than a P2P loan would. However, P2P loans might not be a feasible in a pinch, since you might not get the money fast enough. While the approval process is fairly fast, you still have to wait for your loan request to be funded, and then you have to wait for the money to be deposited in your account. If you can wait a little while for the money, though, P2P lending can be a relatively simple and inexpensive way to borrow.
Comparing P2P Loan to Bank Loan and Credit Card Cash Advance
This table summarizes some of the key benefits of P2P loans when compared to bank loans and credit card cash advances. Please note that information is based on information found on the P2P lending websites and information gathered from my own banks and credit card issuers (so your experience may be different).
|Lending Club||Bank Loan||Credit Card Cash Advance|
|Lenders||Lending Club||Banks and Credit Unions||Credit Card Companies|
|Application process||Easy. You can apply online in a few minutes.||Difficult. You will have to go to the branch. Some lenders may let you apply online or remotely.||Easy if you already have the CC. Otherwise, you have to apply for a credit card online, but this only takes a few minutes.|
|Minimum credit rating||A FICO score of at least 600||A FICO score of at least 670||Doesn’t matter if you already have the credit card with a line of credit.|
|Access to money||As little as 7 days||As soon as next business day after approval.||Instant.|
|Interest rate (APR)||5.99% to 32.99%||8.49% – 19.99%||Usually 20% or more depending on the card.|
|Loan amount||Up to $40,000.||Usually up to $20,000.||Usually less than $10,000 depending on your credit limit.|
|Payback amount||Equal payment across the life of loan.||Equal payment across the life of loan.||At least the minimum payment due each month.|
|Payback period||Fixed period of 3 years or 5 years.||Fixed period, usually 1 to 6 years.||Depending on how fast you pay it down, but it could be a very long time if you only pay the minimum amount due.|
|Impact to your credit||Minimal.||Minimal.||Could be negative.|
Using P2P Loans Instead of Borrowing from Family and Friends
Another option is to borrow money from your friends and family, but it can be embarrassing to borrow from them. P2P lending can help you avoid this embarrassment. On the other hand, you might not mind getting help from friends and relatives. In this case, P2P lending can actually be helpful for everyone involved.
When you borrow from friends and family, you should put together a loan agreement, and interest may even be involved. If you work through P2P lending, someone else takes care of all the particulars of the transaction. You get a reasonable interest rate, and family and friends can still sign up to help fund your loan — and earn a return. Plus, others can help you without breaking their own budgets, since it’s possible to fund a loan with as little as $25.
Even for those with good credit, getting a more traditional loan can be challenging right now — not to mention difficult to apply for. Lending Club and Prosper can help you get funding, while providing access to a reasonable interest rate, and a relatively painless application process.
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Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own blog at Miranda Marquit.