Peer-to-peer lending is slowly changing the financial landscape, giving alternatives to both borrowers and investors.
The peer lending market is expected to hit $312.6Bn this year, fueled in part by technological advancements in the industry that help platforms quickly evaluate loans.
Despite setbacks over the years, grey areas in regulation, and other challenges, today's industry boasts numerous peer-to-peer lending platforms catering to all sectors of the economy. You'll find platforms focused on consumer loans, small business finance, real estate development, etc.
Today, we'll be looking at some of these platforms and what makes them stand out. But first, let's look at the peer-to-peer lending market. What is it? How does it function? What are the pros and cons compared to traditional credit facilities?
What is peer-to-peer lending?
Peer-to-peer lending, also known as crowdfunding, or social lending, is a form of borrowing where instead of a bank, borrowers connect directly with individual lenders through platforms. As such, peer lending eliminates the middleman resulting in better loan terms and other benefits.
Peer lending is not a new concept. People have been borrowing from each other for generations. For instance, an entrepreneur may borrow from parents and friends to kickstart a business. What has changed? Tech-enabled platforms are simplifying the process and bringing more people on board.
Peer to peer lending platforms facilitate the transaction and also set the rates and terms on loans. However, they do not own the funds. They only act as the marketplace, bringing together willing borrowers and lenders.
How does peer to peer lending work?
For borrowers, peer-to-peer lending eliminates the hassle of getting a loan. Unlike traditional financial institutions that demand mountains of paperwork and take forever to approve a loan, peer lending platforms require less documentation and approve loans faster.
They process loans faster because they use cutting-edge technology to evaluate loan risks. Indeed, most peer-to-peer loans are handled online and automatically, further reducing disbursement times.
While each peer-to-peer lending platform uses its own processes and procedures, there are similarities common to most. The process for borrowers typically follows these steps:
- The borrower opens an account with details on their financial needs and situation. The peer lending platform runs necessary checks.
- The borrower is assigned a loan grade based on their credit check. This score helps lenders evaluate creditworthiness and risks.
- The borrower may be asked to submit supporting documents such as employment records, other debts, etc., for review.
- The peer lending platform then evaluates, approves, and lists the loan so lenders/investors can fund it with proceeds forwarded to the borrower within a few business days.
- Finally, the borrower services the loan (principal & interest).
On most platforms, personal loans range from $2000 and $35,000, with loan repayment periods ranging from a month up to five years.
Lenders / Investors
For investors, attractive returns are among the major reasons they participate in peer to peer lending markets. It also helps them diversify into different asset classes while offering an opportunity to fund social causes.
Investors have different processes. It goes something like this on most platforms.
- Open an account on a peer lending platform and satisfy all “Know Your Customer” requirements.
- Access the platform to view and evaluate loans. Investors can also use the auto-invest tool to evaluate and invest in loans automatically.
- Allocate money to various loans to spread risk, then sit back and wait for the loan interest plus your principal.
- Most peer-to-peer lending platforms have low minimum investment requirements making them ideal for even new investors.
Top peer-to-peer lending sites
Prosper is one of the oldest and most popular peer-to-peer lending platforms in the U.S. Founded in 2005, Prosper has facilitated more than $12B in loans to more than a million people, according to their website.
Borrowing on Prosper
Borrowers can access up to $40,000 in personal loans on Prosper. Unlike most other peer-to-peer lending platforms, Prosper allows joint applications.
The loan comes with a fixed rate of either three or five years, with your monthly payment constant for the loan duration.
- Easy funding process
- Joint applications available
- You can borrow two loans at once
- No prepayment fee
- Relatively high maximum APR of 35.99%
- A high minimum origination fee of between 2.4%-5%
- Late fees of $15 or 5% of the unpaid loan amount.
- Borrowers with slim credit profiles not eligible
Investing with Prosper
Investors can choose from up to seven different loans “risk” categories.
Each category has an estimated rate of return and level of risk. Double A-rated loans have an estimated return of about 4.99 percent, B-rated loans return 5.77%, while the lowest-ranked, HR, or high-risk loans have an estimated return of approximately 11.74%.
The platform has a low minimum investment requirement of $25. With that, you can take up positions in different loans to spread out your risk.
Prosper investors must meet specific requirements before they qualify for an account. These include:
- An individual investor must be 18+ years with a valid Social security number and a checking or savings account.
- Investors must reside in eligible states. These are Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
- Investors in Alaska, Idaho, Missouri, Nevada, New Hampshire, Virginia, and Washington must satisfy an additional financial requirement of at least $70,000 annual gross income and $70,000 net worth.
LendKey is the premier peer-to-peer lending marketplace for student loans. Founded in 2009, LendKey connects people interested in private student loans and those refinancing student loans to credit unions and community banks.
LendKey is most suitable for consumers who want to compare different student loans from a single platform.
While LendKey originates and services all the loans through its platform, it's the more than 13,000 partners who fund the loans. Consequently, loans have different terms and rates based on lender and state.
LendKey student loan terms
- Fixed Rates: 4.99% – 9.01%
- Variable Rates: 2.99% – 8.15%
- Loan amounts: From $1,000 up to 100% cost of attendance (subject to aggregate limit)
- Loan terms: 5, 10, and 15 years
- Borrowers on LendKey must meet the following criteria:
- Must be enrolled, at least half time in a degree-granting program or at an eligible school
- Be a U.S. citizen or permanent resident.
- At least 36 months of credit history and an annual income of $24,000 apply without a cosigner.
- Have a GPA of at least 2.0 and show satisfactory academic progress based on your school's guidelines.
- Must be considered a legal adult in their state of residence.
While eligibility criteria vary by lending partner (banks and credit unions), LendKey only matches you to offers for which you qualify.
- You can borrow up to 100% cost of school attendance.
- No application fees, origination fees, or prepayment penalties
- Potentially low-interest rates and favorable loan terms.
- Simplified loan process
- Apply with a cosigner if you have an annual income of less than $24,000 or short credit history.
- Payments are required while you're still in school.
- Eligibility criteria vary based on the lending partner.
- Borrowers can only refinance up to $125,000 for undergraduate student loans.
SoFi, short for Social Finance, is a San Francisco based peer to peer lending platform. The company launched in 2011, founded by four Stanford Graduate School of Business students.
From its humble beginnings as a student loan refinancer, SoFi has grown to include other products and become a one-stop-shop financial provider.
Indeed, borrowers can use SoFi personal loans for a variety of reasons. These include credit card debt consolidation, medical costs, home improvements, etc.
However, SoFi personal loans cannot be used for these reasons:
- Small business purposes
- Investing in securities
- Real estate development
- Post-secondary education
Student loan financing
SoFi has continued to build on its first product – student loan refinancing. To date, the platform has facilitated more than $18B in student loan refinances to more than 250,000 members.
However, unlike other student loan platforms, SoFi concentrates on refinancing to working graduates who can use the funds to refinance these loan types:
- Graduate PLUS loans
- Private student loans
- Unsubsidized Direct loans
Borrowers can choose between fixed and variable rates, with loan terms ranging from 5 – 20 years. They are qualified for a minimum of $5,000 and a maximum of 100% of “your qualified education loans.”
Here are some notable features of SoFi personal loans
- Loan amounts: $5,000 – $100,000
- Loan terms: 5 – 20 years
- Fixed rates: 5.99% – 18.83% APR
- Time to fund: 3 business days
To qualify for a student loan refinance, borrowers must:
- Be a U.S. citizen or permanent resident.
- Have graduated from a Title IV accredited university or graduate program
- Be currently or soon to be employed.
- Have enough income and responsible financial history.
Looking at some of SoFi's lending numbers, their typical borrower has the following average figures:
- FICO score: 753
- Gross income: $151,144
- Loan amount: 31,634
- Average monthly free cash flow: $5,696
SoFi's focus is on borrowers with reasonably decent credit scores (700 and above) and a respectable income.
- Zero fees, including late fees
- High loan limit of $100,000 for borrowers who need large loans
- Fair interest rates for qualified applicants
- Must have a good credit history with scores of at least 700 to qualify
- Borrowers with excellent credit can find better rates with other lenders.
- The funding process is slower compared to competitors.
Ultimately, SoFi is not just a peer to peer lending platform but a community. The platform aims to be a one-stop-shop financial, investments, insurance, career, financial advice, etc., hub. As such, borrowers benefit from affordable loans and get the necessary guidance to manage their money better.
StreetShares is a Reston, Virginia-based crowdfunding platform and community with a particular focus on veterans.
Furthermore, unlike most platforms that focus on consumer loans, StreetShares lends to small and medium-sized businesses for operations and growth. Companies must have been in operation for at least a year and show healthy revenues. As such, StreetShares does not lend to startups.
Indeed, a business must satisfy the following criteria to qualify for a loan:
- At least a year in business (sometimes six months)
- A personal credit score of at least 620
- Business revenues of $100,000 per year
StreetShares for Borrowers
The peer-to-peer lending platform offers two types of loan facilities with varying terms. These are:
- a) Installment loans
- b) Lines of credit
A. Installment loans
Installment loans come as a lump sum, with borrowers expected to make weekly repayments after that. Typical loan terms and fees include:
- Amounts: $2,000 – $250,000
- Loan term: 3 – 36 months
- Interest rates: 6% – 14%
- APR: 7% – 39.99%
- Closing fees: 3.95% – 4.95%
To qualify, borrowers must:
- Have a minimum credit score of 540+
- At least one year in business
- At least $75,000+ in annual revenue
Businesses can only borrow up to 20% of their annual revenue, with the loan value capped at $250,000.
Also, repayments must be made weekly, with borrowers who miss a payment attracting an additional fee of $10.
B. Lines of credit
Unlike a short-term installment, a credit line establishes a credit limit beyond which a borrower can't access funding. As a borrower, you can draw on your credit line for the term, and you only pay interest on the credit used.
Once you pay off the balance, that credit becomes available to use again.
StreetShares line of credit has the following features:
- Amounts: $5,000-$250,000
- Loan term: 3-36 months
- Interest rates: 6%-14%
- APR: 7% – 39.99%
- Draw Fee: 2.95%
To qualify, borrowers must satisfy the following requirements:
- A credit score of 600 and above.
- At least a year in business.
- At least $75,000+ in annual revenue.
- Fewer borrower requirements compared to banks
- Affordable interest rates
- No prepayment penalties
- A fast and straightforward application process
- Limited borrowing amounts (20% of annual revenue)
- Weekly repayments with misses attracting a penalty
StreetShares for investors
As a peer-to-peer lending platform, StreetShares utilizes money raised through Veteran Business Bonds to fund loan requests.
The platform offers two types of investments to individual investors.
a) The Veteran Business Bonds
The Securities and Exchange Commission regulates Veteran Business Bonds. It's available to all U.S.-based investors starting at just $25 and incrementing with $25 up to $500,000
Your investment money is pooled with other investors, and the money is used to fund loans on the StreetShares platform. As borrowers make repayments, investors get interest payments.
Currently, StreetShares investors enjoy an average return of 5% on the investments.
Unfortunately, StreetShares Veteran Bonds are relatively illiquid. You cannot withdraw your money at will because the platform must adhere to its lending agreements with borrowers. As such, you incur an early withdrawal penalty if you liquidate your bond before the three years limit.
b) StreetShares Pro Investing
This product is for accredited investors only.
An accredited investor is an individual or married couple with a net worth of at least $1,000,000 (minus their primary residence value). Alternatively, they can be individuals with an annual income of at least $200,000 each year for the past two consecutive years, or $300,000 for a married couple.
While StreetShares is moving from offering this investment to individuals, those already investing enjoy higher interest rates and take on more default risks.
Founded by ex-Googlers in 2012, Upstart is a unique peer-to-peer lending platform. It utilizes AI and machine learning to evaluate borrowers, unlike other platforms that rely mostly on FICO scores.
As such, Upstart is quickly inching towards its goal of “improving access to affordable credit while reducing the risks and costs of lending.”
To date, Upstart has facilitated loans of more than $6B to borrowers.
Borrowing with Upstart
Upstart uses cutting-edge AI and machine learning algorithms to determine your creditworthiness. For instance, they factor in your education, area of study, and job history before approving your loan.
Borrowers can access personal loans from $1,000 up to $50,000, with hovering around 8.85%. Loan terms run from three or five years with absolutely no prepayment penalties.
- Fast, secure, and straightforward loan application and disbursement process.
- Affordable rates for personal loans
- Zero prepayment penalty
- Loan approval depends on various factors and not just your credit history.
- Huge loan amounts up to $50,000
- Rates can go high with a maximum APR of 35.99%
- Limited loan terms of just three and five years.
Upstart for Investors
As a peer to peer lending platform, Upstart welcomes investors. However, unlike other crowdfunding platforms, Upstart investing is a little bit different.
For instance, when banks originate loans, they are transferred to an obscure type of trust – the Delaware Statutory Trust that then issues securities to investors, entitling them to payments from the loan.
On the plus side, investors can set up self-directed IRA's using investments from peer-to-peer lending.
Additionally, investors can choose to invest automatically through the auto-invest feature on the platform.
- Low minimum investment of $100
- Auto-invest available
- Expansive credit-scoring model
Only open to accredited investors
Credit-scoring models with limited track records
Peer to peer lending is here to stay. It's revolutionizing people's access to credit.
The platforms above are a testament to the industry's innovations, catering to diverse personal and business needs. From student loan refinancing to personal loans for home improvement and healthcare, peer-to-peer lending opens up the credit market to hitherto poorly served market segments.
With strong tailwinds in its favor, the peer to peer lending industry can rival traditional credit markets and offer diversification opportunities to retail investors. It also offers attractive rates compared to traditional banks.