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Personal loans from P2P lenders are helping many

[Jul 8, 2011.]

 

Lending via peer-to-peer websites is going strong as many borrowers give up on getting loans from banks. Prosper and Lending Club, the biggest peer-to-peer lending sites, have generated more than $500 million in personal loans over the past five years, according to a recent Wall Street Journal article. Many borrowers who don't feel confident about getting a personal loan from a bank are turning to P2P lending sites, but that doesn't mean you're guaranteed approval.


Credit scores do matter


P2P websites allow borrowers to receive a loan funded by a pool of investors who might put up as little as $25. Having multiple investors spreads some of the risk around, and could result in you getting a lower annual percentage rate (APR) than if you borrowed from a bank. However, you'll still need to have a decent credit score and source of income to pay back the loan. The higher your credit score the lower the interest rate you'll be offered.


Investors want to make money


Being viewed as a bit of a risk won't automatically result in being turned down for a personal loan. Investors on these sites are looking to earn money and will get a better payoff if the loan is made at a higher interest rate, so riskier borrowers might get approved.


Pros and cons of P2P loans


So what are some of the pros and cons of P2P lending? The upside to these loans is that there may be a sense of community, so the people lending funds may be open to hearing your story about why you need a loan. They also may be more willing to lend to you if they feel like they know who they are lending money to.


A drawback of using these sites is that you are revealing your financial situation to a bunch of strangers. If you are uncomfortable with this type of personal information being out there, P2P lending might not be for you. A research study also showed that people who were rated as more attractive and trustworthy based on a photo received higher credit rating when applying for a P2P loan.


If you're fed up with banks but need to get your hands on a loan for your business, school or some other reason, a P2P loan could be a good solution. But don't expect to get approved just because you're a nice person who means well. You'll need to show that you are a good credit risk who is likely to pay back the money.




 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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