The advantages (and some disadvantages) of the loan between individuals

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Everyone has times in their life when they need a lump sum right away, when they don’t have time to make a savings plan and wait until they have accumulated the necessary funds. Borrowing money can either be a long process full of paperworkdelays and credit checks – or it can be quick and easy, like with credit cards and cash advances, but also comes with high interest rates.

And that’s if you can even obtain a traditional loan or a line of credit. In these circumstances, many people turn to personal loans from friends and family, but it is also a way potentially harm relationships. Or some desperate people might go to a payday lender, which is a really bad idea. But there is another option which strength work for you: peer-to-peer (P2P) lending.

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What is peer-to-peer lending?

Peer-to-peer lending involves borrowing money from one or more private investors instead of a bank or other organization. It’s a kind of crowdfunded personal loan – instead of borrowing, say, $5,000 from a bank, payday lender, or your uncle, you borrow it from strangers. This usually involves a platform like Prosper Where Funding Circlewhere investors choose the loans they want to fund.

Typically, loans are funded by multiple investors at once, but the borrower makes a single monthly payment which is then split among the lenders. They make money by charging interest and you meet your short-term financial needs without having to deal with a bank or other financial institution.

How P2P Lending Works

Getting a P2P loan is a fairly straightforward process, but the specific steps vary by platform:

  1. Identify the straight platform. Different platforms offer different rates and have different minimum and maximum amounts you can borrow (usually these are around $40,000 to $50,000).

  2. Complete a preliminary application. This is similar to any loan application and will ask you why you want the money and provide personal information, such as pay stubs and tax records, to prove your proof of income.

  3. The platform will manage your credit score and review your application. Based on this information, you will be given a rating, which investors will use to decide if they want to lend you money and on what terms.

  4. Review the offers. One or more investors may be willing to fund all or part of your loan. You will have the opportunity to review the proposed terms and decide if you wish to accept any of them. If your loan is finally approved, you receive your funds and the repayment schedule begins.

Keep in mind that most of these loans will charge you an origination fee, just like a traditional loan. Typically, these fees are around 5% (again, this varies) and they usually come from the amount lent. In other words, if you borrow $5,000, the platform will only deposit $4,750 into your account, with the rest taken care of. This means you may need to adjust the amount you borrow to ensure you get the amount you actually need.

Why P2P?

There are many reasons why a P2P loan could be an attractive option:

  • Convenience. P2P lending is generally an entirely online business, so you don’t have to show up at a bank or credit union to sit and watch a loan officer as he frowns at a screen of computer. You complete the online application, upload documents, and review your options entirely over the Internet.

  • Easier approvals. If you were turned down for a more traditional loan because your credit score and history are poor, you might have better luck with a P2P platform. Investors can set their own level of acceptable risk for their money; if there are enough investors on the platform who don’t care too much about your financial mess, you will get this loan.

  • Better conditions. There are no guarantees, but you can often get better loan terms through P2P platforms. Interest rates may be lower than standard rates offered by banks because investors pool small amounts of money individually and can tolerate lower rates of return.

It is important to note that P2P lending also has some potential drawbacks:

  • Higher fees. P2P loans are not automatically better than bank loans or other traditional loans. They can be structured in different ways and you could end up paying more fees for your loan than you would at a bank, so be very careful.

  • Fewer services. Banks and credit unions usually have entire departments devoted to servicing loans, and if you’re having difficulty repaying your loan, you can often get surprising help, as the bank would rather make arrangements than make loans. collections or non-payment. A P2P lender is decentralized, which can mean less support and getting slapped a lot faster.


Like everything else on the Internet, the P2P ecosystem is plagued by scammers who take advantage of desperate people. For lenders, the risk is waking up one day to find that a platform has shut down and run away with the money they invested. For borrowers, the risk is more Phishing— obtain your personal and financial information in order to create fraudulent accounts. You sign up on a P2P platform hoping to get a small loan, and instead your identity is stolen.

There are a few basic ways to avoid this spell:

  • Due diligence. Start by researching the various P2P lending platforms and avoid those with bad reviews or Nope reviews at all. Avoid P2P platforms that are less than three years old – most problematic P2P lenders break down and stop in a year or two.

  • Licence. P2P lending platforms are regulated by the government, and must hold applicable licenses in the state or nation in which they operate. Make sure the platform you’re considering is properly licensed, and beware of P2P lenders operating in countries that don’t have the best track record when it comes to financial regulation.

  • Accounts moved. Check where the platform does its own banking. If the platform has its offices in the US but banks in Venezuela, for example, that’s a red flag.

  • Clear communication. Scam platforms often fail to provide you with the written loan agreement – ​​you should be able to review the terms of the loan you agree to before committing.

Borrowing money from a peer-to-peer lender can be a good option if you’re having trouble borrowing money the more traditional way. The key is to make sure you actually get a better deal – the paperwork and effort of a traditional loan might be worth it if you get a better rate from a more reliable lender.

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