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Peer-to-peer (P2P) lending platforms and traditional lenders both offer online loans. The primary difference between the two is that P2P platforms connect investors who lend money to borrowers trying to get a loan. Traditional lenders use their money to finance loans directly. If you're looking for a loan, you might want to learn more about the differences between P2P and traditional lending. In the end, the platform you use might matter less than your specific loan offers when making your decision.
What Is Peer-to-Peer Lending?
Peer-to-peer lending is a way for people who need a loan to borrow money directly from investors, rather than from banks and other lenders. Peer-to-peer lending was first made popular in the mid-2000s. The idea was to connect investors who wanted to earn interest on loans with borrowers looking for a loan.
You can apply for P2P loans through online P2P lending platforms that handle all the logistics—verifying the identity of the borrower, setting the credit requirements, transferring the money and collecting repayments. The platform might also keep both parties' identities anonymous, only sharing information about the borrower's loan request and credit.
Although investors commit to funding the loans, P2P platforms don't necessarily make a direct connection. The platform or a third-party financial institution might fund the loan and then sell the loan, or the loan's proceeds, to investors on the platform.
The P2P concept and initial online process were revolutionary in some ways, but P2P lending's popularity is waning. Some platforms have shut down their P2P marketplaces, while other P2P loans are now largely funded by companies or accredited investors, who are generally wealthy or financial professionals.
Some companies are sticking with a more direct borrower-to-lender relationship. For example, Solo Funds, one of the largest Black-owned personal finance platforms, has a marketplace for emergency loans. It offers a more personal experience than other P2P platforms because lenders see the borrower's first name and last initial, the reason they want the money, their history on the platform, a score and the tip they're offering lenders. However, these are for small loans with short repayment periods—an alternative to a payday loan rather than a large debt consolidation loan.
What Is Traditional Lending?
Traditional lending refers to arrangements where banks, credit unions and other financial institutions offer borrowers loans and supply the financing for these loans. Examples of traditional lending include applying for an auto loan at your local credit union or a mortgage from your bank. Traditional lending can include personal loans, student loans, lines of credit, business loans and other types of credit accounts.
Although the funding comes from the financial institution where you apply, that doesn't necessarily mean the company keeps the loan on its books forever. With mortgages, it's actually common for some mortgage lenders to sell the mortgage loans they originate, which is one reason your mortgage servicer (the company you send payments to) can change.
P2P Lending vs. Traditional Lending
There are some high-level differences between P2P lending and traditional lending. In practice, you might find that getting a loan from a P2P lending platform is similar to going directly to a lender—especially if you're looking for and applying for loans online. Although the funding works a little differently behind the scenes, the application and repayment process is largely identical.
| P2P Lenders | Traditional Lenders | |
|---|---|---|
| Funding | Connect investors and borrowers | Directly fund the loan |
| Types of loans | Primarily personal loans | Many options, including personal, auto and home loans |
| Where to apply | Online | Online or at local branches |
| Generally requires a credit check | Yes | Yes |
Is Peer-to-Peer Lending Safe?
Yes. Getting a loan through a trusted peer-to-peer lending platform may be as safe as getting a loan from a traditional lender. As a borrower, you'll often go through a similar identification and credit check process, and the lender may use similar safety measures to keep your personal information private.
Lenders take on a risk that the loan won't be repaid if they commit to funding a loan on a P2P platform—but investments are always risky. The platforms may offer scores or ratings that help lenders gauge the risk of different borrowers or loans. P2P platforms may also cover unpaid amounts if the platform approves a fraudulent loan application, or it might offer investors a fee-based loan protection program that can limit their losses.
How to Apply for a Peer-to-Peer Loan
Applying for a P2P loan is also often similar to applying for a loan from a traditional lender. The steps will vary depending on the platform, but if you're applying for a personal loan from a P2P lender, you may need to:
- Share basic info to get preapproved. Before submitting an application, you can share a few details about yourself and your desired loan to see if you're you're preapproved. If you don't get preapproved for a personal loan, consider alternative options or see if you can add a creditworthy cosigner to your application.
- Compare your loan offers. If you get preapproved for a loan, you might receive several loan offers with varying loan amounts, repayment terms, monthly payments and interest rates. Compare the offers and choose the one that works best.
- Complete the verification requirements. The P2P platform may ask you to upload copies of your documents to verify your identity, income and employment—such as a government ID and recent pay stub. The P2P platform might start collecting investor commitments at the same time.
- Get your loan. Once the P2P platform verifies your information and has enough commitments to fund your loan, it can send the loan proceeds to your bank account.
The entire process might take around five business days. But the exact timeline can depend on how long it takes the P2P platform to verify your information and secure the funding, and for your bank to process the transfer.
Compare Personal Loan Offers
If you're looking for a personal loan, you might want to focus on the different loan offers' fees, interest rates and repayment periods rather than whether you're applying on a P2P platform or directly with a lender. After all, no matter who funds the loan, you'll need to repay it based on those terms. You can use Experian's free comparison tool to get preapproved for loan offers based on your unique credit profile and then quickly compare the offers without hurting your credit score.