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Peer-to-Peer Loans versus Personal Loans

Tuesday, 05 Aug 2014 03:35 PM

 In the US, home equity financing is the cheapest source of cash for most consumers. For those who lack home equity, though, the choices are fewer and more expensive. Options are typically limited to credit cards or personal loans (also called unsecured loans or signature loans) from banks and finance companies. In recent years, a new choice has appeared – peer-to-peer (P2P) lending.

How Does P2P Lending Work?

Peer-to-peer loans are also personal loans – short term (typically three-to-five years) and unsecured, which means borrowers put up no collateral – but the loans are made by individuals (or groups of individuals) to individuals.

Lenders and borrowers “meet” through intermediary companies (in the US over 98 percent of all P2P loans go through Prosper or Lending Club), which evaluate and pre-approve them for participation. Applicants are assigned a credit grade, which determines their interest rate. For this service, the intermediaries collect a fee. Peer-to-peer lenders only offer their loans via the Internet. They do not have brick-and-mortar branches, which keeps their costs down, and those lower costs may reduce the cost of borrowing.

Compare rates for personal loans now.

P2P vs Personal Loan Interest Rates

How much do peer-to-peer lenders charge? It depends on the applicant’s credit grade. In June 2014, annual percentage rates on Prosper ranged between 6.73 percent for AA applicants to 34.12 percent for high risk borrowers. Loan terms are three-to-five years and rates are fixed. With Lending Club, the range is 6.78 percent to 29.99 percent.

What about rates for personal loans from banks and finance companies? A look online turns up a wide range in offerings. Here’s one list of online rates from a credit union. They appear comparable to those of the P2P sites:


FICO Rate
760+ 6.78%
720-750 10.99%
700-719 12.53%
680-699 15.93%
660-679 17.32%
640-659 20.49%
620-639 24.10%
580-619 26.55%
< 580 29.99%


Each lender, whether P2P or traditional, assigns rates to various credit ratings, and each lender has its own way of determining an applicant’s credit grade. The grade and rate assigned to the same applicant can vary – some are very generous to highly-qualified borrowers but very expensive for riskier applicants, while others are less punitive at lower credit grades or less generous at the high end.

Which Is Better?

Some borrowers prefer P2P lending as a matter of principle – they’d rather borrow from a person and not an institution. Others don’t care where the money comes from – they want the best rate and terms, period.

In the personal lending landscape, offers are highly individual, so getting the best rate means comparing offers from several sources, both P2P and traditional.

Applying through Prosper or Lending Club costs nothing (there is a fee if one actually takes out a loan), so the only risk to applicants is the hit their credit scores can take when the intermediary generates a credit inquiry. Consumers can compare the rates of traditional lenders by contacting them or searching online, or they can try free shopping services like LendingTree, which provides free credit scores / grades and offers for personal loans from competing traditional lenders.

Click here to compare personal loans.

To get the personal loan with the best terms and lowest rate, then, consumers should compare offerings from several sources – and P2P lending is just one of those sources. Peer-to-peer loans are not necessarily the lowest-priced alternative, but the competition they provide seems likely to push traditional lenders to offer more attractive terms.

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In the US, home equity financing is the cheapest source of cash for most consumers. For those who lack home equity, though, the choices are fewer and more expensive. Options are typically limited to credit cards or personal loans (also called unsecured loans or signature...
lendingtree, peer, to, peer, loans
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2014-35-05
Tuesday, 05 Aug 2014 03:35 PM
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