Personal Loans

Peer-to-Peer Loans: An Option for Consumers with Excellent Credit

Comments 6 Comments

After a couple of rocky years, peer-to-peer lending (P2P) has been making a comeback. Now with the SEC involved, P2P lenders appear to be on solid ground again.

For those not familiar with the concept, P2P lending is a form of alternative financing. These loans take place on an online P2P lending site, such as Prosper and LendingClub. These sites act like the middle man in the loan transaction. A would-be borrower creates a “listing” that often includes a photo and details of the loan request. The loan then gets funded by a multitude of P2P lenders who visit the site.

There are no banks involved, so there are no overhead expenses to pay for. These loans aren’t just for those who don’t have the credit score to go through traditional loan channels. If you’re the borrower and you have a FICO score higher than 750, you might come out ahead financially with a P2P loan.

Here’s why:

Better interest rates. According to MarketWatch, the current national average for personal loans is 9.73 percent. And if you’ve been considering transferring your credit card debt to a balance transfer card, the current average rate on those cards is a 12.93 (V) APR. Let’s compare these rates to those of the two major P2P lenders, Prosper or Lending Club. Both of these lenders have scoring systems that are hard to generalize. But we’re looking at the best rate, so it’s safe to assume excellent credit is required.

[Resource: From Debt to Wealth]

Prosper’s top rates depend on the length of the loan. You get a 5.93 percent APR for a 1-year loan and a 6.33 percent APR for a 3-year loan. These APRs goes to those with an AA Prosper Rating. Prosper uses Experian scores, along with other credit history and economic data, to determine a borrower’s rating.

LendingClub uses FICO scores (and other credit history information) to determine your Loan Grade, which is their rating system. According to Lending Club’s site, if you have a FICO score of at least 770, this most likely translates into an A1 Loan Grade, which gives you around a 6.78 percent APR.

These APRs aren’t written in stone, of course, since P2P lending websites look at more than your credit score. But these rates give you an idea of whether or not you can save money by pursuing this option.

[Partner Spotlight: Interested in peer-to-peer lending options? Apply for a personal loan with a low rate through Prosper.com]

Unsecured, fixed rate loans. These days, you almost can’t find a credit card with a fixed rate. If you have a lot of credit card debt at a variable rate, the thought of a fixed loan probably makes you swoon. You can borrow up to $25,000 (depending upon the length of the loan) on both Prosper and on Lending Club. Note, though, that the length of the loan also impacts the exact APR you get.

Easy online process. Read the the eligibility requirements for both sites. Just so you know, the requirements on Lending Club are higher. When you choose the site to use, you can apply online. Even if your loan is approved to be funded, this doesn’t guarantee that you’ll get your loan. Sometimes, loans simply don’t get fully funded. To give yourself a better chance, be honest and sincere when you create your listing. And using a photo of a puppy with big eyes doesn’t hurt, either.

Image: Quazifoto, via Flickr.com

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  • http://www.sociallending.net Peter Renton

    Good article Beverly. I think for most people, even if they don’t have excellent credit, they will find the interest rate at Lending Club and Prosper better than they would get from their credit card company. With over half the loans on these platforms for debt consolidation it is the most common use of funds in p2p lending. As you point out paying a lower, fixed rate of interest for a finite amount of time is very appealing to borrowers. If the borrower has a FICO score of 660 or more, I would guess that they will find a better rate, particularly at Lending Club.

    One minor correction. Last week Lending Club raised their maximum loan amount to $35,000. Prosper is still at $25,000 but they will likely match it at some point.

  • Beverly Blair Harzog

    Peter, thanks for your comments. And thanks for the update about Lending Club’s new maximum loan amount. I’ll be writing more blogs about P2P lending so I hope you’ll drop by again. :)

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  • Kellie

    I have a 705 credit score (which I just checked today) and was told by prosper it was too low. Do you know what it needs to be to be considered?

  • Beverly Blair Harzog

    Kellie–you have a pretty good score so my guess is that there’s something else in your credit history or financial situation that’s preventing you from being approved as a borrower. Generally, Prosper requires only a 640 score (Experian). I suggest you contact Prosper and ask for more details.

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  • D. DeLaurentis

    Our son has college loans in the amount of $45,000 with over $500/mo in payments, plus a car payment. Can you give us advise on where we can get a personal for under 10% to help “stop-the-bleeding”!!

    Thank you

    • Beverly Blair Harzog

      D–Wow, that’s a big loan to repay. If you have excellent credit, you might check out Lending Club or Prosper and see if you can get a rate under 10%. The maximum loan amount at LC is $35,000, but if you can get that at a low rate, it would save a bunch on the interest expense. Also, check with your local bank where you have a checking or savings account. If you have a good history with them, they might work with you. Good luck!

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