Peer to Peer Loans vs. Bank Loans…What Is The Difference?

The changing demands in financial lending are giving birth to new lending platforms like payday loans and peer to peer lending. Peer to peer lending is pretty a new concept that eliminates the use of banking institutions to offer credit facilities to consumers. People do not need to visit a bank to acquire loans as they get them from other people. On the other hand, investors do not need to invest in stocks or bonds but rather in the community.

Although peer to peer lending also known as person to person lending or simply p2p works similar to traditional lending, it does have its benefits. Like in banks, individuals are offered loans depending on their creditworthiness. Banks interest rates are higher because these institutions factor in overhead costs like buildings, staff and other facilities.

In peer to peer lending, the borrower and investor work directly online eliminating the need for physical infrastructure like buildings. With p2p lending, you save money as an investor or borrower. Banks need to cater for high administrative costs, infrastructure and marketing costs before they make profits. It is these costs of running banking operations that partly contribute to high interest rates than p2p lending.

You can get low interest rates of about 6.5 % on personal loans with the person to person lending. This substantiates the reason why people are turning to these kinds of loans to meet their financial needs. If you have credit card balance carrying high interest rates, you can refinance that by acquiring a p2p loan at a much lower interest rate.

Because of the risks involved in lending, peer to peer lenders like Lending Club and Prosper use eligibility standards to reduce loan defaults. Although the credit score for the borrowers does not have to be perfect, the underwriting is much stricter. The credit history of borrowers is checked including current delinquencies, bankruptcies, collection accounts, open tax liens and FICO score.

You may not be approved of these loans if your credit score is below 660 but you do not have to be discouraged as there are ways in which you can improve the score and be able to get approval for the loans. Peer to peer lenders like Lending Club and Prosper have focused on providing personal loans to borrowers with high credit score at rates, which are far much less than those offered by banks and credit card issuers.

The trend in peer to peer lending is increasing with Lending Club recording a 300% growth in loan originations in the last 12 months as at the beginning of 2013. Lending Club has reached a $1 billion mark of loans issued since its inception in 2007. The concept of peer to peer lending was initiated in 2006 with the pioneer entities being Prosper and Lending Club.

With the peer to peer loans, there is high credit quality where an average borrower has 700+ FICO score and income close to $70,000. The loans attract low interest risks with an estimated lending duration of 15 to 30 months. In addition, with this p2p lending, there is low volatility, diversification, and correlation. As more institutions invest in p2p lending, the market it is going to gain more scalability and accelerated growth. There is high cash flow with principal recovery starting within the second month.