Financial IQ

The Future of Lending

In the past, there was one place to go when you wanted a loan: the local bank. In 2015, you have many more options, and peer-to-peer lending is proving to be an attractive choice for many borrowers looking for a good deal – plus individual lenders looking for an investment option. In fact, peer-to-peer lending companies, including Lending Club, Prosper and SoFi, are exploding so fast in popularity they are doubling their lending every nine months or so!

So what’s peer-to-peer lending all about? We have the scoop for you.

What is peer-to-peer lending?

Peer-to-peer (P2P) lending marketplaces offer loans outside of traditional banks by using algorithms that match borrowers with investors according to each party’s requirements. These companies face fewer regulations because they aren’t banks – they are simply acting as intermediaries between the borrower lender(s), meaning fees and rates are lower. Americans borrowed $6.6 billion in loans last year from P2P lenders.

What are the advantages to borrowing from a peer-to-peer lender?

For borrowers with good or excellent credit, you can expect to receive a more competitive interest rate than from a bank. This is especially helpful for consolidating debt: Lending Club recently revealed that borrowers who used a personal loan to consolidate debt or pay off high interest credit cards reported the interest rate on their loan was an average of 7 percentage points lower than they were paying on their outstanding debt. But don’t forget: when consolidating credit card debt you are moving it, not necessarily dealing it with it. Have a plan to make lifestyle changes so you can effectively pay the loan each month – Mint can help you make your plan!

Other advantages? Some lending marketplace create a loan-worthiness profile from credentials in addition to your credit score, including job history, education and social media activity. Plus, the entire application process is much more streamlined: you’ll fill out much less paperwork and can get approval in a day or two.

Who are the lenders on peer-to-peer marketplaces?

In short: anyone! Facing continued stagnation in savings interest rates, investors are looking for new options to grow their money or diversify their investment strategy. Most P2P loan terms are only a few years, so lending to peers creates a return on investment returns without locking up funds for long periods of time.

But a word of caution, there is more risk involved, so potential lenders should do their research – luckily, most marketplaces allow you to diversify investments across hundreds of loans taken by borrowers.