Peer to peer personal loans can be used for any reason but here are a few of the most common
Debt and peer to peer personal loans get a bad name around the financial blogging community but they are really just financial tools. Use them incorrectly and you can smash things up pretty bad. Use peer lending the right way and you can do more things than you thought possible.
Our resource list of peer to peer lending sites gets more than 8,000 visitors a month and is a great resource to see some of the special features and the fees on the different p2p loan websites.
For this article, I wanted to make a resource list of different ways to use peer to peer personal loans. A resource on some of the most popular uses and how to use peer loans the right way.
Advantages and Disadvantages of Peer to Peer Personal Loans
Peer lending is just like any loan. There are advantages to using it or any type of debt just as well as drawbacks. Some of these are specific to peer loans while others are true for all types of loans.
- Peer lending is cheaper to originate than bank loans because there are no branch location costs. Some of these savings are passed through to borrowers in lower rates and some are passed to investors through higher return.
- There are more options for peer to peer personal loan borrowers. If you’ve got bad credit, good luck getting a bank loan. Banks have been closed since the financial recession, only offering loans to people with strong credit. There are many peer lending sites like PersonalLoans that offer loans to people with credit scores as low as 500 FICO.
- Peer loans are generally faster than bank loans and are more convenient. No more dressing up just to impress the loan officer.
Drawbacks to a Peer Loan
- Rates on some p2p loans can get expensive. Since peer lenders loan to bad credit borrowers, they have to make up for higher default rates with higher interest rates. Most loan rates are competitive with bank loans but loans on really poor credit can go as high as 36% APR.
- Some borrowers assume that because a peer to peer loan is online, it isn’t like a traditional loan and doesn’t affect their credit score like a bank loan. Missing a peer loan payment is just as bad as missing a credit card payment. Don’t fall for this p2p lending myth.
A few uses dominate peer to peer loans but you can use them for just about any reason. It’s unsecured debt which means you don’t have to put your house on the loan.
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How to use peer lending to fix your credit
One of the most undiscovered ways to use peer to peer personal loans is to fix your credit. I used a couple of online personal loans to boost my credit score by 140 points after destroying my credit years ago.
There are a few reasons why peer lending can help rebuild a credit score.
- Peer loans consolidate your debt into one bill, making it less likely you’ll forget a payment
- Peer lending is put on your credit report as a non-revolving debt because it has fixed payments and a payoff date. This is better for your credit score than revolving debt like credit card bills.
- Most people save money on interest with peer to peer loans. Those savings can be used to make extra payments on your loan and pay it off faster.
I wouldn’t suggest getting a peer loan just for the sake of improving your credit score but it’s a good source of cash when you need it. Building your credit score is a good side-effect of p2p loans.
How to use p2p loans for education
A lot of the for-profit education companies like ITT have come under fire lately for ripping off students. People are attracted to these places because they give out loans like candy. Problem is, the loans carry very high interest rates and the education isn’t worth half as much as you pay.
Instead, consider getting a peer to peer loan to pay for tuition and costs at a traditional state university or community college. These schools are much more inexpensive than the for-profit schools and they offer a much better quality of classes.
Since online peer loans are personal unsecured loans, you can use them for any purpose. You don’t need to put up collateral like your house for the loan. In fact, I know investors that specifically look for peer borrowers paying for education because they know the person will be able to pay back the loan with a better job.
I’ve highlighted SoFi as one of the best peer lending sites for education loans and student loan refinancing. They also offer personal loans and mortgage loans but the site also requires one of the highest credit scores among lenders.
If you qualify, you’ll get a great loan rate and up to $100 cash back. Check out our SoFi review of peer lending here.
How to use peer to peer personal loans for remodeling
I’ve also used a peer to peer personal loan to pay for remodeling our house. We bought a foreclosed home in 2010 that had been empty for years. It was in a great neighborhood but needed a ton of work including new plumbing, electrical and floors.
The total cost of remodeling was just over $40,000 but we spread it out over two years. To get started, we were able to take out a $15,000 peer loan on Lending Club at a really good rate. I had improved my credit score by this point and was accepted on the larger p2p site.
Don’t go overboard with your peer loans for remodeling. Your home is an asset and it’s worth it to fix it up to improve the value but it’s also easy to sink too much money into it. Spending a few thousand to make it look nicer is one thing, especially just before you sell, but I wouldn’t spend too much on improvements you don’t need.
Typically, the best return on your money for home improvements is in the kitchen, bathroom and bedrooms. This is where using a peer loan for remodeling is going to pay off the most.
Apply for a peer loan for home remodeling – Apply here for rates as low as 5.3%
How to use peer loans for debt consolidation
About 75% of peer loans are used for debt consolidation, taking out one loan to pay off many others. It’s a related idea to using a peer to peer loan to improve your credit score.
More than one-in-five borrowers say they’ve missed a debt payment because they just forgot about the bill. Missing one credit card payment can send your credit score crashing by as much as 50 points. That means spending thousands more on interest rates, especially after all your credit card rates increase automatically when you miss a payment on one.
Debt consolidation can help to reduce the risk of missing a payment. You pay off as many bills as possible with one peer loan. Since the peer loan is deducted automatically from checking each month, you don’t have to worry about missing it.
The biggest warning on debt consolidation is that it’s tempting to run up the credit cards again after you’ve paid them off. You don’t want to cancel the accounts because that can hurt your credit score but you may want to cut up the cards if you have trouble spending too much.
We detailed the process of debt consolidation and using peer loans for bad credit in this article.
How to use a peer to peer personal loan to buy a car
I was an investment analyst long before I was a personal finance blogger. I still do quite a bit of research in stocks and the markets for different clients.
One of the biggest threats these days is car loans and predatory buy-here, pay-here dealers. These places are preying on people with bad credit and charging rates as high as payday lenders. Worse still is that the cars on the lot have been sold and repossessed so many times, they aren’t worth half of what you pay.
I’ve looked at quite a few of these car loan companies with publicly-traded stock. They are making tons of money…which usually means someone else is losing out.
Instead of falling victim to high-interest car loans on a vehicle that isn’t worth half as much, consider using a peer to peer loan and going to a traditional car dealer.
- You can still save by buying a used car but go to dealer-certified lots that sell new and used cars
- Even bad credit borrowers can usually get a peer loan to cover all or most of the cost of a used car at an interest rate a fraction of buy-here, pay-here
- If you get in trouble with your p2p loan, they won’t repossess your car like they would with a traditional car loan
How to use a peer to peer lending to pay for medical expenses
Medical expenses are the leading cause of sudden poverty in America. Even families doing well financially can find themselves on the hook for several thousand dollars in medical bills. That’s where it really gets bad because missing payments shatters your credit score and interest rates skyrocket.
It’s important to take out your peer loan before you start missing payments due to medical costs. Start missing payments and your credit score is going to fall. You can still get a peer loan on bad credit but your rate is going to be much higher.
You should also talk to the hospital about how much your total medical expenses might be before taking out the loan. It will be harder to take out new peer loans before repaying a prior loan so you want to make sure you get enough money to cover everything.
How to use a peer to peer loans to start a business
While less than one percent of peer loans are used to start a business it’s a legit way to use the money. One of the best ways to use debt is to buy an asset that will generate cash enough to pay off the loan as well as extra profits.
While I wouldn’t recommend taking out any kind of a loan to buy stocks, buying or starting a business can yield higher returns. That higher return can justify the interest payments on debt and eventually you’ll have the loan paid off with just the cash flow remaining.
- Make sure you thoroughly research and develop your business idea before applying for a peer to peer loan. Once you’ve got the money, the monthly payments are going to start and you want to be ready to open up for business
- Make sure your choice of business is one that will produce enough cash immediately to make the p2p loan payments or that you have another source of income
- As with other peer lending uses, only borrow as much as you need to get started
How not to use peer loans!
About half a percent of peer loans are used for traveling and 4% of borrowers don’t offer a reason for their peer to peer loan. I won’t say you absolutely shouldn’t use a peer loan for a specific reason but there are some uses that can get you in trouble fast.
It’s no different than any other type of debt. Taking out a loan or using a credit card to pay for something than isn’t going to last or for something you don’t need is a bad use of debt.
That includes vacations you can’t really afford and spending on things you don’t need.
Everyone needs a vacation now and then but do you really need that $5,000 luxury resort getaway?
Use peer loans or any type of debt to buy assets, things that will hold their value or create more wealth. Use peer loans to manage other debt and bills you must pay. Don’t use peer loans just to pile on more debt for stuff you don’t need.
Best peer to peer personal loan sites
We highlighted a few of the best peer to peer personal loan sites throughout the article and in our resource guide but I thought I’d point a few out here. A few of the p2p loan websites are especially useful for a specific type of loan or for different features on the site.
PersonalLoans.com is the best peer lending site for bad credit borrowers. The website generally will loan to borrowers with a 580 FICO or higher but I’ve heard of borrowers with even lower scores getting approved.
One of the best features of PersonalLoans is its loan network. The website itself doesn’t make loans but helps you find the best lender for your loan. Having lenders compete for your loan means you’re more likely to get better interest rates and terms.
PersonalLoans also shines on its different types of loans offered. It can connect you with lenders for peer loans, personal loans and traditional bank loans. Check out this PersonalLoans.com review for all the features and fees.
Click to make lenders compete for your loan – get approved for up to $35,000 today
Lending Club is also one of my favorite peer lending sites both as a borrower and an investor. Lending Club is the largest peer lender in the world and that brings a few benefits to borrowers. You will need a higher credit score of around 660 FICO or higher but rates are usually lower compared to other peer loan websites. Check out this Lending Club review for more features and how to get a loan.
Lending Club also offers business loans though it is a very small part of the site. You’ll need to have been in business for a few years and to be making sales to qualify. Most people I know just opt for a personal loan to use for their business since there are less criteria on getting the peer loans.
There are many more uses for a peer to peer personal loan, in fact you can use the loan for anything you like. These seven peer loan uses are just the most popular among borrowers. P2P loans are quickly replacing bank loans and could soon be the mainstream way to get a loan. Make sure you use debt responsibly and follow this guide on how to use your peer loan.