P2P Lending Process: Applying for P2P Loans


How to Apply for P2P Lending

Applying for P2P Lending can be made easier if you understand the process.   Sometimes Peer 2 Peer lending investors are investing this way because of a personal mission or cause, or because they want to help people fulfill a need.  In most cases these investors are still focused on making sure you are will likely pay off your P2P loans and meet the terms of that payoff, but they are also interested in making it easier for you to do something that is close to their own personal mission.  The best examples include is peer-to-peer lending that funds expenses for adoption, helps pay medical bills, or allows your family to do something it would otherwise not be able to afford.  These types of peer-to-peer loans are popular because it allows the lender to feel good about where their money is, while also giving them enough of a return to compete with other investment possibilities.

Different types of P2P Lending

In some cases the reason is not quite as personal to the peer-to-peer lending investor, and rather they look for someone who they know has a good chance to pay off the loan no matter what the project.  Just like a traditional lending source like a bank, the P2P lending investor cares most of all about whether the person will be able to pay things back.  Yet one major difference between traditional borrowing and P2P loans is that there is not always clear collateral – the investors don’t really want to go through the trouble of taking something if the loan is not paid back and instead choose the person to invest in more carefully to begin with.  Thus the bottom line key for anyone looking to attract P2P lending is to ensure that you appear to be likely to pay things off.

P2P Lending Application

As an example, let’s say you are contemplating graduate school and looking to get a person to person loan because you don’t like the rates on traditional graduate school loans, you don’t qualify for any, or you are taking a non-traditional course of study that does not qualify.  The P2P lender will want to first look at your credit history before extending a person to person loan.  Do you have undergraduate school loans, and have you been paying them down as you should have?  Did you pen a credit card or two after you graduated from college, and have you been paying them on time?  Anything like this, plus car loans and other installment loans will prove how you handle credit when it is extended, an important piece for any P2P lending application.

Sometimes P2P lenders are more willing than others to just extend the loan based on the first step, knowing that you have been good about all types of loans in the past.  But usually they will also want to know that the “project” they are funding is likely to be a success.  This can be easy, such as in the case of a person who has shown great scholarship and academic potential and is now applying to medical school.  All the person to person lending institution has to decide is whether they will likely finish school.  Debt consolidation may be viewed as less risky than small business start-up expenses, or a one time purchase that pays off like a renewable energy system may seem less risky than a major purchase.

P2P loans: The Investors

These steps are often quite straightforward and lead to a suite of information for P2P loans investors about you, your project, and your financial history.  All of this can help the potential P2P loans lenders decide whether to invest in you (keep in mind that investors have often provided the P2P lending platform with criteria ahead of time as far as what types of projects they want to invest in and what financial background they will accept – how much risk they will take on.)

You can compare the application process of the two major P2P loans sites here (these are not affiliate links): Prosper loans application and Lending Club Application and of course for a great unbiased overview you can see Wikipedia’s P2P overview page

P2P Loans vs. Bank Loans

The underlying question for all of the above is really whether you should decide to pursue a P2P loan or a bank loan.  Now in some cases this choice is actually quite easy, given that banks can be very specific about what they will fund and many purposes, especially those without clear equity in something that can be owned by the bank if you fair to pay (a house, car, business, etc.), are not fundable with traditional loans.  But for those cases where the bank might fund your project or purpose, how do you make the choice between P2P funding and a bank loan?   There are really only three things to consider, and the first one may be the only major decision point:

  1. The loan rate is the major piece of decision-making when you actually have a choice between P2P lending and a bank loan.  You may be able to get a significantly lower rate for the same term
  2. In other cases the rates may be similar but the terms may be different.  In crowdfunding you may be able to get a longer term, more variable payments, or some other unique terms that fit you or your project better
  3. Finally, there may be added advantages in getting P2P lending that are like the crowdfunding perks we list elsewhere, including having investors provide a little PR and excitement about your project

P2P loans Reasons

Adopting a baby of an older child can be expensive, with fees and costs that run anywhere from $20-40,000.  Some people take out traditional personal loans to pay these expenses, but they are then hit with high rates and short terms.  P2P lending investors who are motivated to help want to see more children adopted and also want to be sure that the parents who adopt are not at a financial disadvantage when they do.  They therefore give peer-to-peer loans specifically for adoption expenses.  (Prosper may be the leader right now in peer to peer loans for adoption)  Of course these P2P lending investors are not just giving their money away, and they do expect to get paid back, so the individual or couple must often still show credit worthiness, financial security, and a history of paying back loans.  And the adoption must go through and be a success.  But assuming these factors are all positive, this person to person lending can be a great way to pay the steep expenses and allow the crowd funder to do something she or he wants to promote.

Adoption P2P loans are just one example.  Some other examples of mission driven and/or personal P2P loans include:

– Help starting certain nonprofits that will have missions that the crowd wants to promote.  While the crowdfunding investors will still need to like the business plan and financial security of those starting the business, they may also have an interest in the mission of the prospective non-profit and a wish that this type of company do well.

Urban renewal type projects where neighborhoods will get cleaned up and helped.  Peer to peer lending can help give back either to an actual area or an area just like where a group of crowdfunding investors grew up.  This type of loan becomes its own payback mechanism, as the area becomes a more valuable and attractive place to live which helps businesses that took out the loan.

Assistance to certain cultural groups or disadvantaged populations for education or small business start-up.  Sometimes it is not the project or purpose as much as it is the person that attracts the P2P lending funder.  Thus the crowdfunding may be undertaken to help a group that the person wants to give a leg up.

The application process for these types of P2P loans for personal reasons is often done in two parts.  First, you need to make a compelling case that your mission matches the mission of the investors.  Why are you choosing to do this?

P2P Loans Interest Rates

Of course sometimes P2P lending is given for a personal reason that is not quite as meaningful or important to the crowd, but does allow them to charge a higher interest rate and therefore get a better payoff.  As with banks, peer to peer lending for personal reasons carry higher interest rate potential than educational or small business loans, so the crowd may be interested in entering these agreements with those who look likely to pay the loans back.  Sometimes the person looking for the loan does not even have to say what it is for, but really only has to prove that they are likely to pay it back, but at other times the reason is important so that the peer-to-peer lending investors know that it will not go over budget or otherwise lead to additional financial stress.  Some examples of this type of P2P lending include:

P2P loans for home improvement projects.  In this example there is some sort of collateral given that presumably the house will become more valuable.  It is also a fixed and finite cost which may be attractive to the investors who want to be sure that the person will be able to recover enough financially to be able to pay things back.

Disadvantages of P2P Loans

For some P2P Lending is not the best choice.  This may have to do with the project that you are proposing, or the crowd that will be funding your project.  You need to make sure, in general, that you know what all your potential funding options are, including traditional bank loans, before you choose P2P lending.  Here are some of the possible disadvantages you might discover:

  1. You may find that the crowd who wants to find your project will be more demanding as far as details they will want to know along the way.  The reporting requirements may be daunting and you may find that you will have added stress when you have had a period of not being able to work on the project yet the lenders want an update.
  2. The terms of your peer-to-peer lending contract may not be as positive as you expect, again often depending on the project.  In areas where you cannot find investors that are deeply committed to a certain area or type of project you may find that the terms are not that different from the loans you can get from traditional banks.
  3. P2P lending may not even be available for your project, even after you put a lot of time and effort into trying to find investors.  Again, this may be especially true if you choose a project that there are few investors who are very interested in.  P2P loans may seem easy to get, but unlike traditional loans there is actual competition to get them.

Peer to Peer Lending Helpful Hints

Here are some hints that may help you as you apply for P2P lending for your project or purpose:

  • Present yourself honestly and openly.  Keep in mind that much of what you report as far as your financial history and current situation can be verified, and you don’t want to be disqualified.  There are peer-to-peer loan investors who will fund your loan even if you do not have perfect credit, for example.
  • Related to the above, do your homework about your financial situation.  In other words, if you have a default but don;t remember when it was, don’t guess.  Instead make sure that you know exactly when things happened.  If you are inaccurate even though you did not mean to be you could still be disqualified.
  • Clean up your credit if you can.  If there are dings on your credit report that are inaccurate, or you made payments late and would like to see if the company will forgive them as far as their reports to the credit monitoring agencies, correct these ASAP.  This could get you a lower rate or longer term.
  • Apply for only what you need.  Some peer-to-peer lenders may hesitate to fund large asks, as measured either purely by the amount or maybe by your debt to income level.  You can always go back to the crowd for another peer-to-peer loan if necessary.
  • If you are using a platform that allows you to state your reasons and even describe them in detail, be clear and concise, and be compelling not only as to why you want to do the project but also why you can be trusted to pay the money back.
  • Do the math when it comes to potentially paying back your peer-to-peer loans early.  If you have extra money that could pay back the P2P loan, inventory all your debts and pay back the ones that carry the highest interest rates (after any tax breaks are factored in)

See also some of our blog posts: Peer to Peer lending for bad credit and our general information about Peer 2 Peer loans.

Conclusions Regarding P2P Lending

No matter the reason, P2P loans for personal reasons are an attractive choice for many people who otherwise have either no choice or only high interest bank rates to turn to.  This emerging area in the person to person loans arena may see high growth in good economies where most people can find a job that will allow them to pay everything back.  If you so choose, let others know using the comments section below how your own P2P lending experience went and best of luck in applying for P2P loans.