How Does Peer-to-Peer Lending Work?

The peer-to-peer lending experience includes two parties: individuals seeking a loan, which may be used for business or personal purposes, and accredited investors who are willing to offer small loans to invest in the business. As a result, most individuals seeking the loan will collect several small loans rather than one large one. For example, a small business owner might be seeking a $10,000 loan for new technology and collect ten $1,000 loans to cover those expenses.

Loans are not exclusively used for small businesses. Loans for personal use, such as purchasing a house or to pay for tuition, are also available.

The Loan Process

Peer-to-peer websites such as Lending Club (read our review here) allow individuals to complete an application for a loan, which can be reviewed by multiple lenders. The process begins with a soft check on your credit score to determine your rate. If your rate qualifies you for a loan, you will receive multiple loan styles to choose from. Once you choose the right loan, your application will be processed. Then the website will connect you with investors who want to provide a loan.

Peer-to-peer lending offers opportunities for individuals who many not be able to find a loan from a traditional financial institution. For instance, a small business in need of a loan to launch the business may not be able to secure a loan from a local bank, but an interested investor may choose to provide funding. Additionally, individuals can often secure these peer-to-peer loans more quickly. Some even offer financing in just days.

Peer-to-peer lending has some disadvantages as well. First, individuals are limited in the type of loans they can secure. Sites such as Lending Club offer loans that are smaller with shorter terms than traditional banks, according to the U.S. Small Business Administration. Interest rates on peer-to-peer loans are typically higher as well. That can mean that individuals or businesses that receive the loan will be paying more in the end. In addition, credit checks are stricter to secure these loans, so only individuals with good credit scores will receive them.

Peer-to-peer lending is a viable option for both individuals and businesses. Before exploring a site like Lending Club or Prosper, do the research and consider the advantages and disadvantages to determine whether it is a suitable fit for your needs. You can also examine the top online loan sites or the best business loans to make sure you’re getting exactly what you’re looking for.