Peer to peer lending and borrowing has occurred since the beginning of time. However, it wasn’t always done efficiently, and borrowing from complete strangers was difficult. P2P lending companies such as Lending Club and Prosper now exist to help solve these problems, but many consumers seem to wonder whether Lending Club and Prosper loans are a scam.
This article focuses on Lending Club and Prosper loans from the perspective of the borrower. I’ve discussed investing in peer to peer loans in another article.
Are Lending Club & Prosper Loans a Scam?
P2P lending companies are not banks and their loans are not a scam; rather, these companies match potential borrowers with potential investors and collect a small fee for acting as the middleman. They allow people to borrow money from other consumers who are complete strangers.
P2P lending companies facilitate the lending and borrowing process for both investors and borrowers, making it a much more legal, efficient, and secure way of lending and borrowing money.
P2P lending can be a great deal for both the investor and borrower. It can be a great deal for the borrower since the borrower is oftentimes able to borrow money at a lower interest rate than through a traditional bank loan, credit card, or payday loan.
Peer to peer loans can also be a great deal for investors, since they may be able to earn a much higher return on their money than through other common alternatives.
Benefits of P2P Loans
There are several great benefits of P2P loans that you should be aware of:
- Borrowers of peer to peer loans oftentimes are offered more favourable loan terms (i.e. lower interest rates, lower fees, etc) than what they would receive from other options, such as a credit card, bank loan, or payday loan.
- You can apply to borrow money for just about any reason, including to pay off your credit cards, start a business, repair a vehicle, or make home improvements.
- Peer to peer loans are generally unsecured, so you won’t lose your house if you default (your credit will just take a hit).
Downsides of Peer to Peer Borrowing
I personally cannot think of any big downsides of considering a peer to peer loan if you need a loan. If you need to borrow money and a P2P lending site will loan you money on more favorable terms than anyone else will, then it seems like a no brainer to go there for the loan.
However, if a traditional bank or other lending alternative is willing to loan you money on better terms than the P2P lending company (or the P2P lending company is unwilling to lend you money perhaps due to a poor credit score), then it probably makes sense to look elsewhere for a loan.
Other than spending a few minutes filling out an application, I don’t see any downsides to seeing the terms on which a P2P lending company will loan you money if you need a loan. There appears to be a lot of upside with very little downside.
Should You Borrow?
Just because someone is willing to lend you money does not mean you should borrow the money. If at all possible, try and save up for major purchases rather than take out a loan, whether that be a P2P loan, auto loan, student loan, or a credit card.
Save for your financial goals in separate online savings accounts or money market accounts that will reward you for your money. Using separate accounts will keep you from spending the funds on something else.
That said, if you do need to take out a loan, there are definitely some great reasons out there to consider borrowing money from a P2P lending site.
For example, if you are paying 18% interest on your credit card debt and a P2P lending company like Lending Club or Prosper will lend you money at 8% interest, then using the P2P loan can potentially save you a lot of money. Simply use the P2P loan funds to pay off the credit card debt and pay only 8% interest rather than 18% on your outstanding debt.
P2P Lending & Borrowing Process
If you want to borrow money from one of these P2P lending sites, here’s how the process normally works:
- The borrow fills out a short loan application and provides certain information, such as desired loan amount and loan term, credit score, income, what the money will be used for, and how it will be repaid.
- There is an initial screening done by the company based mostly on the borrower’s credit score.
- If approved, the borrower is assigned a risk profile/loan grade, which determines the interest rate he or she must pay on any loans received.
- Investors are then able to see information about the borrower and the desired loan and decide whether or not they want to invest in that loan (fund the loan). Tools on the sites make it incredibly easy to screen loan applicants using various criteria, such as credit rating, repayment history, loan to income ratio, and what they plan on doing with the money.
- Once the desired amount of funds has been raised, the loan is funded and the borrower begins to make payments of principal and interest back to the investors. Interest rates are generally fixed and borrowers can typically prepay a loan without penalty.
Tips for Borrowers
Here are some tips for borrowers:
- Be specific and honest about what you will do with the money from the loan and how you will pay it back.
- It may help to provide a personal budget showing that you will be able to make your payments on the loan.
- If you are not approved at one P2P lending company, you can always try the other company (Lending Club/Prosper).
- If you want to increase your chances of qualifying for a loan or lower the interest rate you are charged, start working now to improve your credit score.
- If you have outstanding loans or are otherwise in debt, set up an appropriate plan to get out of debt.
- After receiving a loan, make sure you make your payments–it’s the ethical thing to do. Additionally, P2P lending companies report to the credit bureaus, so defaulting on your loan will hurt your credit score.
How has your experience with P2P lending and/or borrowing been? Are Lending Club & Prosper loans are a scam? Leave a comment below!