The credit crisis that followed the economic meltdown of 2008 has never really ended; banks are gun shy about lending to anyone with less than stellar credit, and some small businesses have a hard time getting capital.
Unconventional Lending Sources
The difficulty of getting credit from traditional financial institutions has made some borrowers turn to unconventional sources, including peer-to-peer lenders. These are web-based companies that were founded to match people with money to lend — individual investors — with borrowers who need cash. This can be especially helpful to sub-prime borrowers, whose credit scores disqualified them from borrowing from suddenly ultra-conservative banks.
Cutting out the banks has made more money available to more people, and the lower overhead of these online-only companies allows them to often offer lower rates than credit card companies. An asset-backed loan such as a home equity line of credit (HELOC) from a bank is still probably going to be less expensive than a peer-to-peer loan, but for purposes such as debt consolidation, the average 14.8 percent rate charged by LendingClub — one of the largest U.S. peer-to-peer lenders — is well below the 20-plus percent you could end up paying on a credit card. If your credit is very good, your rate from LendingClub may be as low as 7 percent; however, rates can soar to 24 percent if you credit is poor.
Peer-to-peer Giants: LendingClub and Prosper
The two largest U.S.-based peer-to-peer lenders are LendingClub and Prosper. Along with the new regulations came a wave of Wall Street and big money bank investment in peer-to-peer platforms; WellsFargo is now the largest investor in LendingClub. This takeover doesn’t mean peer-to-peer lenders aren’t worth considering. Their rates still tend to be lower than traditional banks, and they will often make loans for smaller amounts than a bank.
For individual borrowers, loan amounts range from about $1,000 to $35,000 at LendingClub and Prosper. As they would for a bank, borrowers fill out a loan application (online) and a “soft” inquiry confirms if they meet the criteria for one of the service’s lenders. Fixed rate loans are offered, typically with a term of three or five years. While you’ll pay less monthly for the five-year loan, the interest charges will be substantially higher if you go that route.
Peer-to-peer for Small Business
If you have a small business, there are peer-to-peer lenders that specialize in small- and medium-sized enterprise (SME) lending; an area banks have been slow to get back into. These include Kabbage and FundingCircle. There’s even a peer-to-peer service specifically for student loans (SoFi).
Be aware that LendingClub and Prosper will take an origination fee of about 1 percent to 5 percent of the loan total out of your loan proceeds before you receive the money, and penalties for late payments can be stiff. As with all other forms of credit, the higher your credit score, the less you’ll pay in interest and fees.
Before plunging into the peer-to-peer pool, investigate all avenues. If your credit is good enough to qualify for the lowest rates offered by peer-to-peer lenders, you may also qualify for a credit card that offers 0 percent on balance transfers. You’ll likely only have 12 months instead of 36 or 60 to pay off the balance before being whacked with a high rate again, but you’ll potentially reduce interest.
Do your homework on what’s available through traditional sources. LendingMemo.com has a Free E-Book that details the pros and cons of peer-to-peer loans.