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6 September 2016
The peer-to-peer lending sector has become a workable and convenient alternative to the traditional bank-based lending system. If you need to take a loan, take advantage of P2P platforms acting as marketplaces bringing together loan-seekers and loan-givers without resorting to the services of a bank. This solution may prove a win-win deal for all parties: you can get better repayment terms while lenders receive a higher return on their investment than with a savings account, and the P2P websites themselves profit via a fee.
Peer-to-peer lending 101
Peer-to-peer lending, also called debt crowdfunding or crowdlending, is the method of lending funds to individuals or entrepreneurs via dedicated online platforms that charge a fee for their match making and credit verification services. Since P2P lending is principally an online activity, such websites can offer lower fees and APRs than classic brick-and-mortar banks.
Getting a P2P loan typically involves a quick application process. It work this way: you need to choose a suitable lending platform and fill in an application form online to estimate your credit risk and set corresponding interest rate. After that your loan request will become available to all potential lenders registered on the platform.
When the funds are collected in full, you will need to provide all required documents proving your current employment status and income to get the loan. For example, UK borrowers usually need to have a salary starting from £12,000 and 3 years of address history in the country. The raised funds, minus a P2P platform service fee, will be sent to your bank account within 1-2 days of the receipt of your signed documents.
Most P2P loans are unsecured consumer loans that you need to repay in between 1 and 5 years, but this type of lending is rapidly expanding to new product categories such as medical plans and secured loans. Annual interest rates offered by P2P sites may vary from 4% to 40% basing on their credit check. The money may be used to cover home improvements, buy a new vehicle, refinance debts, or for any other purposes.
Equity crowdfunding vs. debt crowdfunding for businesses
Typically, there are two principal forms of business crowdfunding: equity crowdfunding (MicroVentures, AngelList, Republic, Wefunder, etc.) enabling private investors to fund startups and small businesses in exchange for becoming a shareholder of that company, and debt crowdfundling (Zopa, Funding Circle, Lending Club, and others) enabling people to lend money to individuals and entrepreneurs in exchange for a financial return on their investments.
Crowdlending is considered to be a less risky investment model because there is an obligation to repay the debt through a fixed pre-agreed payment plan and at a fixed APR. Due to this obligation, P2P credit providers focus on established small and medium-sized companies that have been in business for over 24 months and already generate profit (at least $75,000 in annual sales for the US market). Early-stage companies can’t comply with this rule, so they should choose equity crowdfunding instead.
P2P lending platforms
Peer-to-peer lending websites operate as automated intermediaries – instead of lending their own funds, they match people who want to lend money and people who want to borrow money. The loan-seekers usually need to pay a one-time origination fee – a fixed percentage of the amount that they receive. As for investors, they can also be charged a 1%-2% service fee.
Founded in 2005, Zopa is the main online P2P marketplace in the United Kingdom. It offers users to take £1,000-£25,000 loans for 1, 2, 3, 4 or 5 years. The average loan amount is £7,300. According to Zopa’s statistics, people usually borrow money to pay off their high interest rate credit card balances, buy a new car or finance home improvements.
The company charges a servicing fee depending on the loan terms and amount – from 0% to 2%. The annual percentage rate may vary from 3.9% to 34.9% – there is a special online calculator allowing users to quickly estimate how much they can borrow and how much it could cost.
Based in San Francisco (California), Lending Club is one of the largest P2P credit providers s in the United States. It offers three types of peer-to-peer loans: personal loans ($1,000-$40,000), business loans ($5,000-$300,000), and medical plans (up to $50,000). The loans are available on 1-5 year periods.
The APR set by Lending Club ranges from 5.99% to 35.89% basing on the borrower’s credit score and loan repayment terms. Plus, the borrowers also have to pay an origination fee – from 0.99% to 6.99%. You can eliminate interest costs by paying off your loan early.
Funding Circle is a P2P lending system enabling small and medium-sized businesses to borrow from £5,000 to £1 million for up to 5 years. Launched in the UK, the company now also offers unsecured and secured loans to companies based in the US, Spain, Germany, and the Netherlands.
All loan requests are listed on the platform for up to seven days. The proposed interest rate starts at 6% and depends on the borrower’s risk category and loan repayment terms. When the funds are collected, you will also need to pay a completion fee – 1.5%-6% of the proposed amount.
Prosper Marketplace was the first P2P lending platfrom launched in the USA. It offers various fixed-rate consumer loans for small businesses and individuals. The Prosper Daily app available in App Store and Google Play helps users track their financial activity 24/7 and stay on top of their money.
Prosper Marketplace offers fixed-rate $2,000-$35,000 loans for tenure of 3 or 5 years. The annual percentage rate moves in the range of 5.99% (AA) to 36.00% (HR) and depends upon numerous factors – credit score, loan amount, credit history, etc. Plus, the borrowers also need to pay a 1%-5% origination fee for obtaining money.
The P2P lending system has made the practice of lending and borrowing funds more convenient and affordable. Now you can apply for a loan online from the comfort of your home without the necessity of going to a bank, talking to a credit manager and waiting days for an approval notice. With streamlined lending decisions and more beneficial loan repayment terms, P2P platforms are remodeling conventional lending and make it more user-friendly.
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