Peer-to-Peer Lending vs. Bank Loan
At a Glance
Peer-to-peer lending, when borrowers and lenders are matched via a peer-to-peer lending platform, differs from bank loans in that you’re borrowing directly from investors instead of a bank or similar financial institution. This cuts out the middleman in the loan application, approval, and funding process, making financing more accessible to borrowers and investing more accessible to individuals.
While expected to grow, peer-to-peer lending does come with disadvantages, just as bank loans have their own advantages and disadvantages. Comparing all your options when searching for financing is key.
In this article, you’ll learn:
What is peer-to-peer lending?
Peer-to-peer (P2P) lending is an alternative way to access financing. With P2P lending, investors (both individuals and companies) are paired directly with those who need to borrow money. Unlike traditional loans that come from places like banks, credit unions, or online lenders, peer-to-peer lending allows you to borrow money from an individual person or company who wants to invest in you and your loan.
Then, the investors themselves would collect the interest and fees a borrower would normally pay to a traditional lender. By cutting out that middleman, investors can receive a larger return on their investment, though they are taking on additional risk of loaning money and not getting repaid.
Learn More: Peer-to-Peer Lending | Credello
How does peer-to-peer lending work?
The process of peer-to-peer lending removes the traditional financial institutions from the equation as the borrowers apply directly for a loan via a peer-to-peer lending investment online site, where the investor can choose to fund a portion or 100% of the total of the loan.
To borrow money, the process is very similar to applying for a personal loan or other traditional types of financing:
- Get prequalified. You can get prequalified for a P2P loan through the P2P website and prequalification process. This does not affect your credit score but can give you a more accurate estimate of the loan terms and annual percentage rate (APR) you would qualify for.
- Apply. Once you choose a platform, the next step is to fill out information for an application. The process will ask for information like your contact information, Social Security number and other personal data, and desired loan information.
- Risk assessment. After applying, the loan platform will check your financial history and establish your credit rating, or risk involved in lending to you. Information analyzed includes your credit report, score, job history, education, income, and other details.
- Approval and matching. If your application is approved, your loan will move to the funding stage. At this time, multiple investors will review your loan and will either “pass” or agree to fund all or a portion of your loan, depending on how much you want to borrow and your credit rating. You can also review the terms and conditions of offers from the investors to make sure it is a good fit.
- Funding. Once your loan is backed by enough investors, you’ll receive the funds typically through electronic transfer.
- Repayment. Finally, you’ll make fixed monthly payments to repay the loan, which will then get disbursed to all the investors on your loan (depending on repayment terms). You’d make the payments on the same site you borrow from, and the payment would encompass a portion of the principal, any interest, and any fees.
Keep in mind that each lending platform operates differently, has different fees, and offers different levels of protection to investors. It’s important to do your research to find the right option for you.
What can I use a peer-to-peer loan for?
P2P loans can be used for just about anything as there’s usually no strict requirements. However, for informational purposes, P2P lenders will often ask what the intended purpose of the loan is. Some reasons you may want to get a P2P loan is:
- Medical bills
- Home improvements
- Household purchases
- Funding a wedding, vacation, or other large event
- Car repairs
- Emergency or unexpected expenses
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What is a bank loan?
A bank loan is simply a personal loan you get from a bank (versus a credit union or online lender). You can apply through the bank where you’re an existing customer, or a different bank depending on your needs. Banks typically have higher interest rates and longer funding times, though many have additional features like rate discounts.
When you apply, the bank will review your credit score and history, income, and other factors to determine whether you qualify for the loan and what your APR will be. If approved, the bank will fund the loan and you’ll repay the bank in fixed monthly payments.
Who can get a loan from a bank?
Most banks will accept loan applications from any borrower, though some only offer loans to existing customers. You’ll likely get the best loan offer from your current bank if you have an account in good standing. Additionally, banks typically require borrowers to have a credit score of at least 690 or higher, a strong credit history, and a low debt-to-income ratio.
If you don’t qualify for a bank loan on your own, you can:
- Take steps to improve your credit score and history.
- Find a bank that offers secured loans, which means you’d have an asset as collateral to the loan.
- Find a bank that offers co-signed loans.
What can I use a bank loan for?
As with P2P loans, bank loans can be used for a variety of reasons and there aren’t typically restrictions (though this can vary by lender). For example, they can be used to fund a large trip or event, for home improvement projects, debt consolidation, car repairs, medical bills, emergency expenses, purchase of a vehicle, moving expenses, and more. Check with specific lenders to learn more about any restrictions they may have.
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Peer-to-peer lending vs. bank loan: What’s the difference?
The primary difference between P2P lending vs. a bank loan is where you get the funds. With a P2P loan, the money comes from an individual or company lender through a web-based platform, and they can choose to fund some or all the loan. Then, you repay the platform who then distributes the repayments to the lender(s). With a bank loan, you work directly with the bank to receive funding and repay the loan.
A few other differences include:
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The bottom line is that P2P lenders offer personal loans as other financial institutions do, but they cut out the middleman and connect you directly with an investor who will financially back your loan, unlike working directly with a bank.
For both types of loans, it’s important to do your research and get prequalified where you’re able to see if you’re eligible and be able to compare your options more accurately.
FAQs
A P2P loan can be worth it if:
- You want a loan option with less strict borrower requirements.
- You only need a small amount of funding, though loan amounts can vary.
- You want a fast application and funding process.
- You are ok with an online-only application and customer support process.
- You don’t need much support in terms of customer service.
The best advantage to P2P loans is that you may get better interest rates than other financial institutions, especially if you have a great credit score.
Peer-to-peer lending platforms are safe to use. Not only do they protect and guard your personal and financial information just as a traditional bank or financial institution would, remember that investors are taking on the most risk because if the borrower doesn’t repay the loan, the investor likely won’t get their money back.
While banks do offer personal loan options, they do not offer peer-to-peer lending.
Unlike with other financial institutions and loan options, applying for a P2P loan does not affect your credit score. However P2P lenders report payment information to credit bureaus just as traditional creditors do, which means you must make your payments on time to avoid a hit to your score.
This depends on your individual needs, preferences, and qualifications. Research all your options to determine which type of funding is right for you.
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