Is Peer-to-Peer Lending for Me?

With bank credit so tight, and returns in the market so low, many investors and borrowers have become more attracted by peer-to-peer (P2P) lending portals, like Lending Club and Prosper. For investors, P2P lending offers 5% returns annually, and potentially even more depending on the amount of risk you’re willing to take on, and for borrowers it's a way to access lower cost financing outside of traditional bank structures. At Lending Club, customers can borrow up to $35,000, and depending on their credit, get an APR as low as 6.78% -- half that of an average credit card. Prosper allows loans up to $25,000 and offers rates as low as 6.59%. On the other hand, Prosper also offers high-risk customers loans with rates as high as 35.84% -- which is ludicrous! Lending Club’s highest APR is 27.99%, for a grade G5, 36-month loan.

Many borrowers have found P2P lending to be an excellent way to refinance higher-rate loans, or to consolidate credit card debt. That said, it’s not for everyone. You very well might be able to get a better rate on an auto loan from your local credit union, so do your due diligence. P2P isn’t inherently better for the fact that it it side-steps traditional financial institutions, but because it might be there when a bank or credit union cannot, and it might have lower fees, better user interface, etc.

Read: What's The Difference Between Banks And Credit Unions?

Whether it’s for you depends entirely on the rates offered for your loan in particular. If you have excellent credit and you don’t like the interest rates your bank is offering, do some comparison shopping on Lending Club and Prosper. One offer will likely be better than the other, and you can make your decision this way. That’s the beauty of the web: It offers transparency and alternatives. You’re no longer bound by the information a bank or credit union loan officer is willing to give you -- you can find something better from someone who wants to lend their own money.

All that said, do your due diligence when considering which P2P lending portal to use. Lending Club and Prosper have been around for some time, but there are likely new ones cropping up every other week -- make sure you can trust them with your information and money. As uncool as banks and credit unions are, at least they know exactly where they stand with regulators.

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