How Peer-to-Peer Loans Work?

Peer-to-peer loans have grown in popularity since first being introduced to the United States in 2006. While not a traditional form of lending protected by government insurance, this alternative financial service is backed by the Securities and Exchange Commission (SEC), making the process more transparent and safer in light of the recent financial crisis.

Person-to-person lending is as a way for lenders and borrowers to connect directly. The contact and loan process takes place online, enabling both parties to be able to communicate without an intermediary, like a bank or other financial institution.

Peer-to-peer loan websites are community based and overseen by a company that manages the website and lending platform. As peer-to-peer loans are unsecured loans – meaning that no collateral is needed – approval of the loan is based not only on your credit score but also by your personal story. On the peer-to-peer loans website, you can create a post, much like that on a forum, where you would state much you are looking to borrow, what interest rate you’re willing to pay, and what the loan is needed for. Based on your story, as well as other qualifying information, individuals will contribute a portion towards that your loan. Individual lenders, or investors, take into account both the story of why the loan is needed as well as the risk associated with your assigned credit grade (your grade is based on your credit score).

Person-to-person lending is considered unsecured – all that’s needed on your part is your signature since no collateral is required. Typically, there are no pre-payment penalties and fixed interest rates. There are, however, fees associated with these types of loans and these fees vary from person-to-person lending platform. Usually, the fees are based upon a credit grade that is assigned to you. For example, a peer-to-peer platform might assign a great credit grade as an “AA”; in this example, your fees could be one percent of the loan amount. The next tier would be “A-B”, which would mean that the fee would be two percent of the loan amount; next would be a “C” grade, or lower credit, which could be a fee of three percent of the loan amount.

The credit grade assigned by the person-to-person lending platform is also used so your lending peers to give them insight into how you manage your debts. The benefit to peer-to-peer loans is that you have the ability to explain why your credit is the way it is. For many peer-to-peer loan borrowers, a well-crafted story is crucial to success. Maybe you’ve fallen on hard times or made mistakes; where a bank may be less likely to listen, person-to-person lending communities will.

If you have questions about how peer-to-peer loans work, or if you’re uncertain of the process and want to know all your options, AmONE can help. Our free service helps you find the right loan option for your financial needs. Just complete out our peer-to-peer loan solutions form or contact us today. You can call us toll-free at 888-401-0330. Our experienced financial search specialists are available Monday through Friday from 9:00 AM to 9:00 PM and on Saturday from 9:00 AM to 5:30 PM Eastern time.