After the financial meltdown, lending guidelines tightened, paving the way for peer-to-peer (P2P) lending—a new product that offers consumers personal loans at competitive interest rates.
One primary difference between P2P lending and traditional loans is the lenders; P2P loans are backed by a pool of everyday investors—or peers—instead of financial institutions. The lending companies act as the middlemen between the investors and the borrowers.
“It’s easy to see why people are attracted to P2P loans, because the premise borrows from the credit union philosophy of ‘people helping people’, a principle that has made credit union successful since their inception,” says Frank Perez, Assistant Manager of Consumer Lending at SchoolsFirst FCU. “But, unlike credit unions, which are not for profit and work for their Members, the investors behind P2P lending are in it to make money, so borrowers need to be aware of the additional costs involved.”
Why Consumers Are Embracing P2P Lending
There are a number of reasons Americans are gravitating toward P2P Lending options:
Less Hoops to Jump Through
There are fewer restrictions for borrowing money for any number of reasons—from consolidating debt or paying for college—to purchasing big-ticket items or covering relocation costs.
Shorter Processing Times
The lending process is more streamlined than those found in some traditional financial institutions, so once a borrower is approved, they usually get their loan funded within just a few days
Doesn’t Ding Credit Scores
People like the fact that when they apply for a P2P loan, it’s considered a soft inquiry, which means their credit scores won’t be affected
Competitive Interest Rates
Loan amounts can range from $1,000 up to $35,000. And interest rates are competitive—as low as 4.7% APR, but these rates are reserved for those with stellar credit scores; the national average loan rate for most borrowers hovers around 13% APR on a $15,000 loan. Some programs like Upstart, a P2P lender that appeals to younger adults, looks beyond just the FICO score, and factors in an applicant’s educational background, academic performance and work history.
Loans are offered in three- to five-year terms, which can be an attractive option for many people because it’s a set payment every month, with an end goal that’s clearly in sight.
Lending Fees Can Add Up
It’s important to understand the extra costs for borrowing money for a P2P loan. For instance, lenders charge origination or closing fees above the stated interest rate—ranging from 1% to 5% or higher, depending on creditworthiness and the loan amount. So if borrowers seek a certain dollar amount they’ll need to request more money to cover those origination or closing fees, because they are deducted off the top, when the loan funds.
Late Charges Can Hurt the Bottom Line
Borrowers need to make on-time payments, because late fees can really add up. Prosper and Lending Club charge $15 for bounced payments, and if a payment is more than 15 days late, either $15 or 5%, depending on which amount is greater. Also, many P2P businesses charge to process paper checks, encouraging borrowers to set up online payments.
When taking on a loan, consumers need to make sure they can handle the monthly payments and that they don’t borrow more than needed. Will they be able to handle the payments if an emergency arises?
Making Wise Financial Moves
If you are considering getting a loan to focus on debt consolidation, you may want to check out other options that may be a better fit for your personal situation, such as transferring a credit card balance to one that offers a lower interest rate. But be sure to shop around, and avoid balance transfer fees.
And if you have questions about your financial decisions, such as taking on a new loan, or managing your day-to-day finances, you don’t have to go it alone. Many financial institutions like SchoolsFirst FCU offer free financial advice and education, designed to help you create a secure future. A loan may be a short-term solution, but do you have a long-term plan to keep your finances on track? “We encourage our Members to speak with one of our Member Service Representatives,” says Perez. “They are here to find solutions for both your short- and long-term financial goals.”
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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.
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