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• Peer-to-peer lending is a completely new type of investment compared to stocks and bonds, which allows investors to diversify their portfolios.
• Online lending platforms are websites that facilitate peer-to-peer lending by safely connecting borrowers to investors directly. These lending platforms set all rates, ensure all terms and conditions, and allow transactions.
• A small business owner, such as a real estate developer, who is looking for money to fund a project and has exhausted traditional bank options should consider peer-to-peer lending. 

For small business owners, borrowing money without the hassle of going through a bank is ideal. Banks have extensive eligibility requirements, and even if you're approved, it can take a long time to get the money. Business owners and entrepreneurs who don't have good credit may find it especially difficult to get approved for loans issued by credit unions and traditional banks, even if their businesses are healthy. 

If you need a loan and can't get one from a bank, it's worth considering an alternative lending approach like peer-to-peer lending. Even with less-than-perfect credit, it's possible to get approval for a loan through online lending platforms. 

Online lending platforms are websites that facilitate peer-to-peer lending by safely connecting borrowers to investors directly. These lending platforms set all rates, ensure all terms and conditions, and allow transactions. 

For investors, peer-to-peer lending is an attractive option because peer loans generally offer a higher return on investment than the lender would receive from traditional financial institutions.

What is peer-to-peer lending, and how does it work?

Peer-to-peer (or P2P) lending is a financial transaction in which an investor loans money directly to a borrower through an online platform. Instead of a financial institution lending money, it is individuals who lend to other individuals or businesses, according to Saurabh Jindal, CEO of Talk Travel. 

"Normally P2P lending works online, and the P2P lending platform vets the borrowers wishing to get loans and creates a profile for them on their platform," Jindal told business.com. "The lenders then evaluate the borrower and lend accordingly. Each lender is not supposed to provide 100% of financing for the borrower; rather, it is pooled by various lenders." 

Jindal says that a lender will provide loans to many borrowers, which diversifies their portfolio and reduces risks. The borrowers usually pay a lower interest fee than they would for a bank loan. 

What is peer-to-peer lending for investors?

Individual investors open an online account on a lending platform and deposit money that can be used for peer loans. The applicants who want to borrow that money share their financial profiles and associated risk categories. The interest rate is predetermined, and the borrower then evaluates offers from investors and accepts one. 

Peer-to-peer lending offers investors a way to earn a higher return on their investments than they would receive from traditional investments. But the process can be riskier as well, due to the default rates of borrowers on peer lending sites. 

Peer-to-peer lending is a completely new type of investment compared to stocks and bonds, which allows investors to diversify their portfolios, according to Kyle Gomez, founder of The Potential Of Money. Gomez says that peer-to-peer lending also has these benefits: 

• Control: P2P lending platforms let you choose the types of loans and how much to invest in each one. There are very few restrictions, allowing investors to be as creative as they want to be. 

• Accessibility: Loans range from three months to five years and are usually from a global marketplace. This gives investors massive opportunities that other investment products simply do not provide. 

• Speed: Lenders can invest in loans from halfway around the world in a matter of seconds. 

• High interest rates: Personal loans tend to have a minimum of 10% interest, which is a very attractive return for an investor. 

• No banks: Removing the middleman from loan transactions makes loans cheaper for borrowers and more profitable for investors. Also, though it may seem trivial, animosity for banks has been growing since the 2008 financial crisis. As a result, many investors prefer working on a P2P platform, removing banks from the picture. 

What is peer-to-peer lending for borrowers?

For borrowers, peer-to-peer lending involves pitching their loan request to marketplace lenders and then reviewing offers from investors, according to Shahid Hanif, founder of Shufti Pro. 

"The borrowers select one loan and P2P lending starts," Hanif said. "All the monthly payments and money transfers are handled through these platforms. The process is completely automatic, and borrowers can bargain with lenders as well." 

Peer-to-peer lending can be a great alternative for borrowers with bad credit history, because they may have trouble getting approved for traditional business or personal loan. Peer loans present an additional financing option for a wide range of purposes, including debt consolidation, student loans, real estate projects, working capital, and equipment or inventory purchases for your business. 

What are the types of peer-to-peer loans?

Many peer-to-peer loans though lending platforms are unsecured loans. Many business owners want an unsecured loan or line of credit because unsecured funding doesn't require you to pledge collateral. Contrarily, secured funding requires you to pledge assets that you or your business own, such as real estate, equipment and inventory. 

Business loans

A business loan can help you grow your company, especially if you're in the startup state and attempting to scale. But a business owner's ability to qualify usually depends on their credit profile or the business's revenue. Note that unsecured business loans are likely to carry a higher interest rate than secured loans. 

Typical interest rates for peer-to-peer loans are similar to those of traditional bank loans. Rates for peer-to-peer loans range from 7% to 39% APR, while traditional bank loans range from 6% to 36% APR. 

A real estate developer who is looking for money to fund a project and has exhausted traditional bank options should consider peer-to-peer lending. Real estate lending, or real estate crowdfunding, is a type of business loan that allows a company to fund property construction and development projects with investor money rather than going through a traditional lender. [For more information on small business loans, read our reviews of the best small business loans in 2020.] 

Personal loans

Borrowers can use personal loans to finance vehicle purchases, home improvements or medical bills. These loans can also cover debt consolidation, and they don't usually have the high credit requirements and other criteria of most financial institutions. 

There's a wide range of interest rates on unsecured personal loans. On average, these are short-term loans that consumers can receive from banks, credit unions or private lenders. Most personal loans range from two to five years, and they are usually repaid in monthly installments. Personal loans' interest rates generally range from 5% to 36%, depending on your credit score. For personal loan terms of two to five years, the average loan amounts range from $2,000 to $35,000. 

Student loans

Peer-to-peer student loans can be a great alternative to more traditional forms of educational funding. These loans are a good option for individuals who might not qualify for federal or private student loans. 

Student loans are generally allocated in lump sums, which can allow the borrower to distribute the money according to their school expenses. Most student loans are short-term loans, ranging from one to three years. Interest rates vary, but as a reference point, interest rates range from 6.95% to 35.89% for LendingClub and 5.99% to 36% for Prosper. 

Is peer-to-peer lending safe?

Peer-to-peer lending is generally safe for both borrowers and lenders, since the lending platforms are registered with the Securities and Exchange Commission and work with FDIC-insured banks to issue loans and hold uninvested money. 

Peer-to-peer lending sites have various measures in place to make the process safe, which Jindal says may include these security measures: 

1. They vet and conduct due diligence on the borrowers and give them ratings that are displayed to the investors (lenders). 

2. The platforms provide buy-back guarantees (through insurance) to the lenders. In case of default by the borrower (inability to pay back the loan), the insurer compensates the lender. 

3. The platforms make sure each loan request is met by multiple lenders. A lender who invests in multiple places diversifies their portfolio, thus reducing risk. 

Like any other investment, peer-to-peer lending involves some risks. There are two main risks, according to Gomez: 

1. Defaults: When a borrower defaults on their loan, it could affect the investor. Ultimately, the money being borrowed is your money as an investor to the loan. 

2. Lending site bankruptcy: It's also possible that the lending site will take on too many loans and won't be able to fund them all. 

Peer-to-peer lending has many benefits, such as better return on investment, cost advantages and investor relationships. However, there is one additional risk that individuals should understand – cybersecurity, according to Will Ellis, founder of Privacy Australia. 

"Due to the online nature of peer-to-peer lending, there are gateways for criminals to gain access to your private information, and the fact that this is financial information means that the risks are massive," Ellis said. "There are many forms of cybersecurity which individuals can implement in order to protect their information and create as many barriers between their information and cybercriminals as possible." 

What are some peer-to-peer lending sites?

Marketplace lending connects borrowers with willing online lenders. Many lending marketplaces offer new loan opportunities and loan refinancing. There are numerous platforms within the lending industry, but it's important to do your research and choose the lending company that best meets your business's needs. Here are a few popular online peer-to-peer lending platforms. 

LendingClub

LendingClub is one of the leading online lenders, offering business loans, personal loans, auto refinancing and patient solutions. Business owners interested in the lending site's small business loan can receive capital upfront with terms of one to five years, fixed monthly payments and no prepayment penalties. These are some eligibility requirements for this loan:

• You've been in business for 12 months or more.
• You make at least $50,000 in annual sales.
• You have no recent bankruptcies or tax liens.
• You own at least 20% of your business and have at least fair personal credit. 

Prosper

Prosper is a good lending network for when you need money fast. Prosper allows individuals to apply as borrowers and offers several loan types, including debt consolidation, home improvement, military and small business loans. 

This lending network offers fixed three- or five-year terms for its loans. Interest rates vary by loan type, terms and amounts, and your credit score and financial situation. It allows you to pay off your loan early with no penalties. 

Prosper borrowers must have a minimum credit score of 640, no bankruptcies within the past year and a debt-to-income ratio below 50%. 

Funding Circle

Funding Circle is an online peer lender that's all about small business loans. It was nominated for Best Small Business Loan for Low APR in 2019 by the U.S. News & World Report and won LendIt Fintech's 2019 award for Top Small Business Lending Platform. Funding Circle is an accredited business by the Better Business Bureau and currently has an A+ rating on the site. 

Funding Circle offers fixed-rate term loans, requiring a minimum of two years in business and a minimum FICO credit score of 620. Amounts for its small business loans range from $25,000 to $500,000. 

Can investors make money with peer-to-peer lending?

Peer-to-peer lending is a great way for accredited investors to make money. The investor looks at several loans with varying credit ratings – the higher the credit risk, the more the interest pays out for the investor. 

It's a smart investment option for online investors, who can earn up to 30% returns by lending money directly to verified borrowers, according to Julia Brookes, a consultant for Now Loans. 

"Investors can diversify their investment beyond traditional asset categories to earn returns higher than other sources of investments, such as saving accounts, fixed deposits, corporate bonds, mutual funds, etc.," Brookes said. "The cool thing about P2P lending is that it does empower investors to make micro-investments across various risk levels (high risk equals high expected return, low risk equals low expected return)." 

Hanif believes that investors feel comfortable on peer-to-peer lending platforms because of major benefits like these: 

• Easier approvals
• Lower fees
• Saved time
• Investing in the business of their choice
• Potential profitable returns
• Tax efficiency 

Can borrowers make money with peer-to-peer lending?

While investors can easily make money with peer-to-peer lending, so can many borrowers. For one, the borrower can make money by utilizing the peer-to-peer loan to pay off their high-interest loans, such as credit card debt, according to Marcus Anwar, co-founder of OhMy. 

"By doing so, they would be saving money by paying low interest on their debt," Anwar said. "For example, borrowers can be charged anywhere from 16% to 21% on their credit card debt. If the borrower gets a peer-to-peer loan with a lower interest rate of 5% to 9%, then they would be saving all that money by not paying a high interest rate." 

When done right, peer-to-peer lending can be very safe and lucrative for both borrowers and lenders. However, as with any other financial transaction, you must review each individual loan or investment opportunity on its own merits.