Peer-to-Peer Lending Giants Lending Club and Prosper
Peer-to-Peer lending refers to a trending method of borrowing money that eliminates banks from the process completely. Private Investors provide the capital to qualified borrowers at rates that are actually quite reasonable if they have good credit. Lending Club, an industry leader, is said to reject 90 per cent of applicants. A lot of patently unqualified wishful thinkers apply. Amounts available through peer-to-peer lending vary from $1,000.00 to $35,000.00. A minimum credit score of 640 for Prosper and 660 for Lending Club is required. Don’t expect much without a much higher score than that. Adequate proof of income is to be expected.
A third Peer-to-Peer Lending company named Karrot has emerged. Karrot considers factors such as the number of credit cards held. It requires applicants to turn over their bank account user names and passwords so it can verify their income through analysis of deposits. Payments are scheduled for an optimum time when income is actually received. You can pay by check if you like but there is an extra fee for paying that way.
It is claimed that within 10 years One Trillion Dollars will be loaned out through peer-to-peer lending. Only 3 per cent of peer-to-peer Lending deals go bad which is on a par with banks. Payment history is reported to the credit reporting agencies but not always all three credit agencies.
From the lender’s point of view there is little risk. Diversification of funding (as little as $25.00 each) to numerous projects provides bullet proof protection. This form of investment is far safer than the stock market. A service Called “Lending Robot” automates the Peer-to-Peer Lending process for lenders. Popular loans are funded in less than 30 seconds.
The service has become so main stream that Lending Club now sends out Pre-Approved Offers for set amounts to people with good credit scores. These offers state: “All loans are made by WebBank, a Utah chartered industrial bank, member FDIC.” The offer claims: “More than $5 billion in loans have been originated through Lending Club to over 400,000 borrowers who love us…” Proof of income is still needed to actually get funded but they may take your word for it. Prosper advertises on Credit Sesame’s site offering personal loans at a “low rate” of 6.73% for its best customers. Very few will qualify for that rate or anything close to it. Borrowers need a credit score of at least 660. Most loans are financed at a rate of about 14 percent. Realistically these loans are bridge loans for those not yet qualified for true bank financing. There are no prepayment penalties.
Peer-to-Peer Lending Has Some Advantages
Peer-to-Peer Lending companies are in the business of approving loans. Don’t think this means that they are careless or have shoddy standards. They will do a soft credit pull on an applicant first to see if the applicant is in the ball park without disturbing the credit score. There will be a hard inquiry before the money is wired to your bank account. The interest rate you are charged will depend on your credit score, your income and other factors such as your debt to available credit ratio. The interest rate may be lower than the bank will offer due to the elimination of the bank as middleman. It is certainly cheaper than borrowing against credit cards. The range of interest offered as claimed on their web sites is from 6.75 per cent to 35.36 per cent. There is also a closing or origination fee which comes in at 5 per cent of the loan amount for about 80 per cent of borrowers. This fee can be as low as 1-4 per cent for highly qualified applicants.
Apply to Prosper and Lending Club at the Same Time
My research shows little difference between Prosper and Lending Club in the amount of time borrowers have to wait for their money or the interest rates charged. Since the proposal comes after a soft pull there is no harm done by applying to Prosper and Lending Club at the same time. You can then compare their offers. Their proposals give you the interest rate and the option to increase or decrease the amount of the loan you seek. You will need to answer the same types of questions banks ask such as whether you rent or own. Payments will be automatically withdrawn from your checking account. Self employed applicants may need to submit at least one recent tax return. Lending Club uses Trans Union as its credit reporting agency.
Peer-to-Peer Lending Cautions
Remember that the origination or closing fee comes out of the amount you are borrowing. If it’s 5 per cent of $10,000.00 you need to apply for $10,525.00 to get the $10,000.00 if that’s the exact amount you need. Also remember that the real APR you pay would take this fee into account. The interest you are quoted cleverly camouflages the fact that the origination fee is swept under the carpet. Lending Club’s web site defines an excellent credit score as 720 or above. Prosper’s web site defines an excellent credit score as 760 or above. A “good” credit score to Prosper is 700.
Crowd funding is Different from Peer-to-Peer Lending
There is a lot of confusion as to the proper use of the terms “crowd funding” and Peer-to-Peer Lending. With crowd funding the applicant only gets their money if enough people put up little chunks of cash. Any less than the total amount means nothing at all. Kick starter is the best known of the crowd funding sites. These sites are more in the nature of vehicles to help out creative ideas that need a boost. Typically crowd funding is reward based in the form of investors getting free samples or discounts.
The peer-to-peer lending business is funded by hard nosed investors that are in it for the money. Anyone can invest as a lender. One site that helps investor/lenders manage their accounts and track the accounts in real time is called Lending Robot.