Peer lending may offer better rates but personal loans are easier to get and faster, which is best for your loan needs?
Peer lending is surging with loans on the Lending Club platform nearly doubling each year. Peer Lending has already grown larger than most people would have expected when it got started before the financial crisis and may be about to jump again as lenders get into traditional loan products. Will peer to peer lending replace personal loans and which is the better source for rates on your unsecured loan?
I’ve been following peer lending since before the financial crisis and really got into the idea in 2014 when I started the blog. An interview with Ron Suber, President of Prosper Marketplace, really helped to show the opportunity in peer lending for borrowers and investors.
Against the huge growth of p2p lending, personal loans websites are still growing as well with the drop in traditional bank lending. Understanding the difference between peer loans and personal loans is critical in getting the loan that’s right for you.
Peer Lending vs Personal Loans
There are a lot of similarities between peer lending vs personal loans and maybe the difference is mostly semantic. Peer loans through sites like Lending Club and Prosper are funded directly from investors while personal loans are usually made through the company that owns the website.
The difference is important for a couple of reasons. When you fill out a loan application for a peer loan, your information is verified and the loan goes up on the site for investors to review. Investors can fund the loan with as little as $25 each and when your loan amount is reached, the money is deposited in your bank account. After verification of your personal loan request, the loan can be immediately funded because the website originates its own loans.
Investor demand for loans has been so high that the difference in time to get your money hasn’t been an issue lately. Good returns for peer lending investing have attracted money from individual investors to hedge funds and even traditional banks. This means that most peer loans are funded within a few days. If investor demand for p2p loans were to slow, it might take longer to get a peer loan funded but there’s no sign that this is even close to happening.
Peer loans usually offer better interest rates compared to personal loans. I’m not sure if this is a factor of higher credit score requirements or if peer loan investors are willing to give up a little return to attract more people. Either way, it’s a win for borrowers with rates on peer lending starting around 6% while personal loan rates usually start around 10% on most sites.
After your loan is funded, there’s really no difference between a peer loan and a personal loan. Your monthly payment will be deducted from your bank account and your loan will be paid over a set number of months. In peer lending, the payment is divided among the investors and the peer website disburses the proceeds. The payment for a personal loan goes to the company that owns the website or the bank carrying the loan.
Best Peer Lending Sites for Your Loan
Lending Club is the largest peer lender in the world and one of only two sites that are true peer to peer lenders. Investors in nearly every state can open an account to fund loans and all but two states allow borrowing. The site does require a credit score of 660 or higher which is higher than that required on Prosper and most of the personal loans sites. Rates start around 6% though for good credit scores and business loans are also available.
Prosper is the second largest peer to peer lending site with more than $6 billion borrowed by 250,000 people. Rates are competitive with Lending Club but the site only requires a 640 credit score. One of the advantages of peer lending is that there’s no early payment penalties so you can pay your loan off early to lower the amount of interest you end up paying. Business loans are not available but peer loans are offered up to $35,000 which can be used for any need.
StreetShares is another peer lending option and has a focus on veteran-owned businesses and borrowers. I talked to CEO Mark Rockefeller last year about how the company is helping to fund loans through its bidding process for small business loans. Loans are available for up to $50,000 and the company invests 5% in every loan on the site. StreetShares doesn’t release the minimum credit score needed for a loan but it is likely around the minimum on Lending Club. Unlike the other two peer lending sites, investing on StreetShares is only open to accredited investors rather than the general public.
Best Personal Loans Sites for Unsecured Credit
PersonalLoans is a little different from the other personal loans sites because it’s a loan network rather than its own lender. Your loan application goes out to the site’s network of lenders to get the best rate for your terms. Fees are similar to other personal loan sites and borrowers with a 580 FICO score or higher are accepted.
Upstart is a peer lender but investing is only open to non-accredited investors so I put it down here with the personal loan sites. The lender claims to have a unique underwriting model to base rates off more than just your credit score including work history and the school you attended. Borrowers need a minimum credit score of 640 to qualify and shouldn’t have any loans currently in default.
Should You Use a Peer Loan or a Personal Loan?
The differences between peer loans and personal loans are pretty minor for borrowers. If you absolutely need the money within a day or two, you might be better off with a personal loan but peer lending websites can generally fund quickly if you have all the documents needed for verification.
Peer lending sites seem to offer slightly better rates but require a little higher credit score. If your credit score is at least 640 or higher, you might check your rate on Prosper or Lending Club to see if you qualify.
Actually, most sites do a soft check on your credit to prequalify your loan so it doesn’t hurt to check your rate on a few sites to see which offers the best deal. A soft inquiry doesn’t go on your credit report and so it doesn’t affect your credit score. It’s not until you agree to the loan rate that the lender will do a hard inquiry to verify your information and which will stay on your credit report for up to a year.
I’m partial to peer loans on Prosper and Lending Club because they allow anyone to invest on the sites. Peer loan investing is a huge opportunity and great diversification from a stock/bond portfolio. Allowing non-accredited investors on the sites, makes for a fairer investing environment and that’s something we should all support.
The differences between peer lending vs personal loans may sound insignificant but understanding them can help you get a better deal on your loan. Even a rate one percent lower can mean savings of $100 a year on a loan and other differences might mean getting your money faster. Understand how to use either form of debt as a tool and avoid the pitfalls to reach your financial goals.