In researching personal loans, you might have come across peer-to-peer lending information when trying to find ways to pay off credit cards or cover the costs for the perfect wedding. Names like Prosper and Lending Club may have popped up – some of the companies in the industry. Let’s begin by defining what peer-to-peer lending is and how it actually works.
What is Peer-to-Peer Lending and How Does it Work?
Peer-to-peer lending, also known as social lending, is the practice of loaning money to “peers”, without going through traditional financial institutions, and it usually occurs online. People who want to get a loan choose an amount and investors decide on how to allocate funds depending on the applicant’s risk level. Once the funds are disbursed, the borrower makes fixed monthly payments and investors receive a portion of those payments.
Many people may have recently become attracted to peer-to-peer lending because it is seen as a flow of money coming from real people who want to lend a helping hand – people who can sympathize with those who need a debt consolidation loan or understand the added cost of a honeymoon to a wedding budget. Today, however, there are far fewer “peers” that are actually doing the lending.
Nearly two-thirds of all peer-to-peer loans in 20141 came from institutional investors. Prosper Marketplace is the second-largest peer-to-peer lender in the U.S. and it recently had a significant investment boom of $165 million2. According to Quartz, the majority of this money came from financial institutions like Credit Suisse, JP Morgan Chase, and BBVA.
Peer-to-Peer Lending vs Traditional Lenders
While there is nothing wrong with having your personal loan funded by an institutional investor over an individual investor – nor is there any difference in how the loan is funded – the term “peer-to-peer” may be misleading in today’s environment, especially if it’s the social sharing concept that’s attracted you. There are also other things to consider before taking a personal loan with a peer-to-peer lender.
Comparing Peer-to-Peer Lending to Traditional Lending
While social lending may be a popular new way to get a personal loan, they may offer less flexible terms, they may be more expensive due to added fees, and the delivery of your funds may be slower3 than through other established, “traditional” lenders, like Discover Personal Loans.
Some peer-to-peer lending companies only offer a few terms for the amounts you borrow. For example, Lending Club gives you the choice of 24, 36, or 60 month terms, while Prosper only has two choices – 36 or 60 months. If you’re looking to get out of debt and have it fit within a budget, choosing the most flexible term for a debt consolidation loan is critical. By comparison, Discover Personal Loans offers more repayment term options – 36, 48, 60, 72 and 84 months. We want you to pick the term that’s right for you.
Added fees can also make peer-to-peer lending more expensive than traditional personal loans, on top of the interest you’d already be paying. Some peer-to-peer loans have origination fees that can range from 1% to 5% of the total loan amount. For example, taking a loan with Lending Club could cost you $618 in origination fees, and a loan with Prosper could cost you $594 in origination fees4. Discover Personal Loans has no origination fees, in addition to no closing costs and no prepayment penalties.
Once your loan application gets approved, you will want funds as quickly as possible to begin paying off credit cards or book your family vacation. There’s a reason why you need the money and you won’t want to wait. Some peer-to-peer lending companies can take as much as two weeks to approve and fund your loan, but Discover Personal Loans cuts out the waiting time, almost completely. When you apply for a personal loan, you may get a same-day decision with funds sent as early as the next business day after acceptance.
Consider Your Options and Choose What’s Best For You
We want you to weigh all options equally when it comes to any financial decisions. Compare and contrast each option and choose the personal loan that’s best for you, regardless if you choose to go with a peer-to-peer or traditional lender.
With more flexible loan terms, no origination fees, closing costs or prepayment penalties and faster funding and money coming from a single source, getting a personal loan with a lender like Discover Personal Loans, is a great way to achieve your financial goals whether you’re paying off credit cards or going on a cruise.
4. Origination fee estimates are based on average origination fee % listed in company filings(10.Q)