As homebuyers demand alternatives to traditional home loans, more and more companies are getting into the peer-to-peer lending business, and consumers are responding.
Peer-to-peer lending, sometimes shorted to P2P lending, is a form of crowdfunding that involves borrowing money from individuals rather than from banks or other lending institutions. Of course, people have been doing that about as long as money has been around, borrowing a few bucks from a friend, relative or person of means when the need arose.
How does peer-to-peer lending work?
What's different about modern peer-to-peer lending is that it's formalized into a business relationship with companies that act as intermediaries between borrowers seeking money and investors with money to lend. It generally operates as a form of online lending, with borrowers and investing making arrangements electronically rather than going to a bank or other financial office in person.
For borrowers, the process can be much like getting an online loan from a traditional lender – you fill out an application and choose from a variety of loan products that are offered. The interest rate you pay is typically tied to your credit score and fees may be charged for loan origination. The big th difference is that you're actually borrowing money from and are liable to one or more individual investors, rather than from a bank or the P2P company itself.
For investors, peer-to-peer lending provides an opportunity to earn a better rate of return than some other investments while managing risk. In some cases, you may choose the individual borrowers you wish to lend to; in others, you simply deposit your funds in an account and indicate the level of risk and return you desire, and the company divides your funds up into mini-loans among multiple borrowers, who also are getting their funds from multiple investors.
Can I get a P2P mortgage?
Peer-to-peer lending has been around for decades, but really began to grow in the wake of the 2008-09 financial crisis as banks began to cut off credit. Many peer-to-peer lenders have relatively modest lending caps, limited at around $25,000-$50,000, and are commonly used.
There are not a lot of peer-to-peer lenders that offer mortgages but some P2P firms have been getting into real estate crowdfunding and business loans, with borrowing limits that can run well into six figures.
For borrowers, peer-to-peer loans can offer lower interest rates and fees than a conventional mortgage, with easier credit requirements as well. However, the loan application process can take considerably longer and home sellers may not be willing to wait – in fact, they may prefer to accept a bid from a buyer with conventional financing instead. And should you miss a payment or fall behind, late fees and collection fees can be much steeper than on a conventional loan.
As a rule, with any P2P lender the rate you pay will vary depending on factors like your credit score, loan amount, repayment term and other factors – in some cases, by quite a bit. Borrowers with good credit can get loans for quite low rates, while those with poor credit may end with with loans that have APRs in the 20- or 30 percent range, even higher. So check the fine print and shop around.
P2P lending companies
As the traditional consumer credit market stumbles, peer-to-peer lending is growing in popularity. The concept hinges on bringing consumers who have money together with consumers who need money, for the benefit of both sides.
As with many new industries, P2P lending is in flux. New companies arrive, others disappear, others change their business models. Product offerings may change, interactions between lenders and borrowers may be modified (though only for new loans, not existing ones). Some P2P lenders that used to be in the U.S. market now only operate abroad, and at least one has left the P2P model to act instead as a broker for small commercial lenders.
Some of the more popular peer-to-peer lenders operating in the U.S. are as follows:
- Prosper Marketplace (prosper.com) was the first online peer-to-peer lender in the U.S. and one of the most successful, making over $10 billion in loans. Loan amounts range from $2,000-$35,000 with repayment terms of 3-5 years. Most loans are for purposes like debt consolidation, auto loans, home improvement, small business loans and special occasions such as the purchase of an engagement ring. As with other P2P lenders, the interest rate you pay varies depending on credit score, loan amount, repayment term and other factors.
- Lending Club is the largest and most successful P2P lender, with more than $30 billion in loans made since being founded in 2007. Loans range in size from $1,000-$40,000, mostly for personal finance purposes, though business loans of up to $300,000 are available as well.
- SoFi, a California-based service, is one of the relatively few companies facilitating peer-to-peer mortgages and mortgage refinancing. Homebuyers can borrow up to $3 million with as little as 10 percent down, with products that include 30- and 15-year fixed-rate loans, ARMs and an interest-only option. Other loan types are available as well.
- Patch of Land is another peer-to-peer lender offering real estate crowdfunding, although their focus is on real estate investors rather than residential mortgages.
- GoFundMe is one of the most popular crowdfunding services. However, it's for seeking donations rather than borrowing money to be repaid. Still, one conceivably might use it to raise money for a mortgage or at least a down payment, if your situation can motivate people to give.
That’s just a few of the P2P lenders/crowdfunders out there. Others may be found online. As mentioned above, the industry is still new and in a state of flux, so the way a company does business today may not be true a year or two, or even a few months from now.
(Updated November 2017)