The Basics of Peer-to-Peer Lending: How it Works

If you are looking for non-traditional credit sources, you will probably come across a lot of information about peer-to-peer lending. There are many opportunities for both lenders and borrowers when it comes to peer-to-peer lending, but there is a lot of information to gather before you make the plunge.

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Reviewed by Raphi Shpitalnik

The Basics of Peer to Peer Lending: How it Works

Peer-to-peer lending can be a great option if you are not looking to deal with the more traditional lending options and can qualify for the hard to get loans. These loans are low interest and highly rewarding; they can help business owners get off the ground. 



The process

Peer-to-peer lending platforms work differently from traditional loans. Most people visit online platforms built to match up lenders with potential investors. One benefit is that the lenders and the borrowers never directly handle business together. This helps to keep negotiations and issues at a minimum through the third party
neutrality offered by the website negotiations.

How it differs from a traditional loan

Many borrowers wonder what the main benefits of peer-to-peer loans are over more traditional bank loans that they can get online. Generally speaking, peer-to-peer loans offer lower interest rates than banks can offer. There is also a lot less that goes into qualifying for a loan. The peer-to-peer process is not harsh on your credit score, which is a major benefit. The peer-to-peer process only requires a soft pull on your credit, so it does not even affect your score as far as an inquiry goes. However, you should know that once you accept a loan offer, the peer-to-peer lender will likely go ahead and do a hard pull on your credit report to begin to process the loan.

The qualification requirements for different peer-to-peer loans are also vastly different from each other and from the traditional way that bank loans require approval. Each of the peer-to-peer lending platforms is different; some will have strict guidelines that are often much more strict than a traditional lender. In other instances, there will be looser guidelines that help to get a loan as opposed to a traditional bank.

How to get a peer-to-peer loan

The first thing is to sign up and make a soft inquiry with the lending platform that you think you want to use. There are multiple options for lending platforms, so choose the one that you are most comfortable using. If you qualify, they will match you with several loan opportunities you might be interested in.  During this initial step, the lending platform will give you a sort of pre-qualification offer. They will tell you what they are willing to lend you and what the interest rate will be.  Once you have those offers, you simply review them to decide which offer is best for you. Make sure you read the fine print of the agreement. Not all lenders are created equal, and not all of them have your best interest at heart either. Be aware that many lending sites will offer you more money than you ask for if you qualify for it. This is dangerous territory, and you want to protect your credit score by only taking
out the amount that suits your financial goals.  After you accept the offer, the lender will delve a little deeper into your credit history. They will likely ask for more proof of the initial information you gave them. Kind of like a home loan, this process can take some time to complete.

Final Thoughts


Peer-to-peer lending can be a great option if you are not looking to deal with the more traditional lending options and can qualify for the hard to get loans. These loans are low interest and highly rewarding; they can help business owners get off the ground. 

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