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How Peer to Peer Loans Work

Peer to Peer Loans Offer an Alternative to Traditional Lenders


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Klaus Vedfelt/ Taxi/ Getty Images

Peer to peer lending, or person to person lending, allows you to skip the bank and borrow from individuals. You can borrow from complete strangers or just use peer to peer lending services to structure loans between friends and family. This page covers how peer to peer lending works, the major services, and how you can take advantage of it.

Peer to Peer Lenders Cut Out the Bank

When you participate in peer to peer lending, you’re cutting the bank out of the equation (and replacing it with your P2P service). Banks have their place in the world, but sometimes your best bet is to borrow elsewhere. Peer to peer lending gives you another option for secured and unsecured loans.

Peer to Peer Lending Sources

The peer to peer lending marketplace is quickly growing. The pages below describe some of the major players in detail, including tips on how to qualify for a loan with each P2P service:

Peer to Peer Lending Rates

Borrowing via peer to peer lending usually means you can borrow less expensively. Banks have more overhead than some guy on the internet, and they have to pay for it somehow. Peer to peer lending services also allow individuals to bid on your loan. They compete by offering a lower rate.

Credit Issues With Peer to Peer Lending

You’ll need decent credit to get a decent loan. The peer to peer lending services check your credit as part of your application – and they tell potential lenders how good your credit is. Likewise, if you fail to pay off the loan as agreed your credit will suffer.

Peer to Peer Lending Logistics

In most cases the peer to peer lending service handles all the logistics of your loan, including:

  • Deduct payments from your bank account
  • Send money to the lender
  • Provide a website and customer service
  • Verify identities for regulatory compliance
  • Communicate with credit bureaus
The loan terms vary, but in most cases you have a fixed rate amortizing loan that lasts less than 5 years.
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