Do you need some extra cash? Do you hate dealing with the conventional finance system? Does your credit rating make you look like a waster when you’re not, or do you lack any credit rating at all? Or, do you have splendid credit and still get overcharged for a loan? Maybe peer-to-peer lending is for you.
In peer-to-peer lending your lenders know more about you than your credit rating. So if your rating doesn’t fully reflect your financial situation you have a better chance of getting a loan, with a better rate, than if you go to a conventional lender. In fact, because people-to-people sites take a smaller bite, you can almost certainly get a better rate.
Who is especially likely to benefit from this kind of lending? Students, or people who were recently students, the recently divorced, people who have recently left the military. These are people who may not seem as credit-worthy to conventional lenders. People with wonderful credit can sometimes get unbelievably low rates. People with terrible credit can sometimes get a peer-to-peer loan when nobody else will lend to them. Lots of people with high rate credit card debt come to peer-to-peer. People with appealing stories often do well. However, if you have a lot of bad debt and you crave a red Corvette, try elsewhere.
How does it work? Let’s use prosper.com as an example, because it’s a reliable website I’m familiar with. Other sites include Zopa and Lending Club, and they work about the same way. Loanio is the new kid on the block.
To borrow at prosper, the first step is to join. This is a simple free process much like joining Helium. There can be a financial advantage to being referred, so check to see if a friend or acquaintance is a member before you sign up. Look around the site, and get comfortable.
Now you create a listing. There is a tutorial to walk you through the process, which is much like making your About Me page at Helium. You will have to prove your identity and residence to prosper. You’ll give them your banking information and current address. They’ll verify these things. Decide how much you want to borrow. You can borrow from $100 to $25,000, with the interest rates usually ending up a bit lower on smaller loans.
Next you write a statement about yourself-why you want the loan and what you’ll do with the money. Explain why people should take a chance on you. You should include a budget showing how you’ll pay back the loan. Your financial facts will be verified.
Your statement should show openness, honesty, and acceptance of responsibility. These are qualities that appeal to lenders. Photos also help. Show yourself at your best, but probably not your fanciest. Show your family, or maybe a photo related to your plans for the money. Show the car you’ll be paying off, or the business you want to start or expand. Don’t include your name or address.
Now get endorsements. The best endorsers are already prosper members, whose identities have been verified. But your mother can endorse you, or your friends, or your boss. Prosper members and endorsers never reveal their real names. Not all listings have endorsements, but they help.
Pick a starting interest rate. It’s important not to start too low, because that discourages lenders. Each lender can bid $50 or more, but most bid around $50, so you want a lot of lenders. In a busy auction, your rate will be driven down and down. Prosper has a page that can guide you in interest rates. Or, just start at the worst rate you’re paying now. People bid on your listing for up to 10 days, and then your listing will close.
When your loan closes, if you got your amount and you accept your rate, you deposit your check. Prosper gets a 1% fee, or up to 3% if your credit’s less good. Your payments will be deducted from your bank account for up to three years. These payments all stay the same size, and the interest rate never varies. It’s not like the fancier arrangements seen in mortgages and credit cards lately. There is no penalty whatsoever for early repayment.
It’s a friendly site, with lots of information and interaction. It’s a way for a community of borrowers and lenders to help one another. In fact, former borrowers often go on to become lenders. For many borrowers, it’s a good deal.