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Your Guide to Peer-to-Peer Lending

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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A peer-to-peer loan is a personal loan funded by a group of individuals or institutions. If you’ve had trouble qualifying for a loan through a bank or a credit union, this type of alternative lending — often called a P2P loan — might be a good source of financing. It may also offer a lower interest rate.

To find a P2P loan, you’ll need to go online to a P2P lending marketplace that connects individuals who need to borrow with investors willing to lend. Take a look below at exactly how this product works, and what you need to know before you apply.

What is peer-to-peer lending?

A peer-to-peer loan is an unsecured personal loan, which means you won’t need collateral like a home or car to qualify. As with a personal loan, expect a P2P loan to come with a fixed interest rate, predictable monthly payments and a set repayment term.

A P2P marketplace makes money on its loans by charging borrowers both fees and interest at a percentage of what is borrowed. However, because P2P lenders make loans without using a bank as an intermediary, they have fewer overhead costs and none of the capital reserve requirements that drive up costs for traditional banks.

You can use a P2P loan the same way you use a personal loan, to cover a broad variety of costs, such as:

  • Debt consolidation
  • Emergency expenses
  • Home improvements
  • Medical bills
  • Small business costs
  • Wedding expenses

P2P loan pros and cons

P2P lenders and those who fund the loans tend to be more forgiving than traditional lenders offering personal loans. This means borrowers with a less-than-ideal credit score or who have a short credit history may be approved for funds. However, even if you’re approved, your loan will likely come with a higher interest rate than if you had good and established credit. Further, borrowing criteria is stricter with P2P loans than with secured loans, like a car loan.

With a P2P loan, it may take extra time to have your loan funded than with a traditional lender, although you’ll likely receive your funds within a few days after your loan has been approved. Further, there’s a chance your loan won’t be funded even if you’re approved.

Here’s what you need to consider before applying for a P2P loan:

Pros:

Cons:

  • May offer better rates than brick-and-mortar lenders due to less overhead costs
  • More accessible to borrowers with weak credit history who are otherwise good loan candidates
  • Offers flexible use of funds
  • No prepayment penalties
  • Application process may take longer
  • May come with higher fees and interest rates than secured loans
  • Loan amounts are generally capped at $35,000-$40,000
  • Bad-credit borrowers may still struggle to qualify

How to apply for a peer-to-peer loan

Prequalify

As with any loan, peer-to-peer lending marketplaces will consider your credit, income, outstanding debt and payment history. Before submitting a formal application for a loan, however, you should try prequalifying. Prequalifying allows you to see which lenders would likely approve you for a loan and for what potential terms.

To see if you prequalify, visit a P2P lending website and fill out a preliminary application. You’ll be asked for basic information like: your name, address, birthdate, phone number and email address. You’ll also likely need to provide details on how you plan to use the loan, your salary and employment history and any outstanding debts you may have, like mortgage payments.

P2P lenders usually send out preliminary loan offers within a few minutes of hearing from a potential borrower. You can evaluate these options online without worrying whether it will ding your credit score.

Submit a formal application

If you would like to commit to an offer, you’ll need to complete a formal application online. This stage of the application process will trigger a hard credit check, which may cause your credit score to dip slightly, an effect that’s usually temporary.

A P2P lender may ask you to verify some of the information you’ve already provided, such as your income. Plan on having the following documents on hand:

  • A government-issued photo ID
  • Pay stubs
  • Tax forms such as W-2s and 1099s
  • IRS Form 4506-T, which is used to request a copy of your tax forms or returns directly from the IRS
  • Utility bills
  • Recent bank statements
  • Proof of income from alimony or child support, pension or annuity income, disability insurance or workers’ compensation benefits, if applicable

Once your application is in — along with all necessary documents — a P2P platform will review your application and try to match you with potential investors. If your loan is approved and funded, your money will be deposited into your bank account, often within one to four business days.

3 peer-to-peer lending marketplaces

Some P2P marketplaces are open only to certain types of borrowers, like those who have a high income or net worth. The following three platforms, however, are open to all borrowers as long as they meet certain criteria.

 

APR

Borrowing amount

Repayment period

Minimum credit score

LendingClub10.68% to 35.89%$1,000-$40,00036 or 60 monthsNot specified on lender website
Prosper7.95% to 35.99%$2,000-$40,00036 or 60 monthsMinimum FICO score of 640
Upstart8.69% to 35.99%$1,000-$50,00036 or 60 monthsGenerally 600, although you may still qualify if you lack a credit score because of a short credit history

LendingClub

Most borrowers who are approved for a loan through this P2P marketplace receive their funds within four days. LendingClub doesn’t charge a prepayment fee if you pay off either all or part of your loan early — an important consideration if you’re looking to shave interest costs over the life of your loan. However, like the other two marketplaces listed above, it charges an origination fee to cover the cost of processing a loan.

At LendingClub, the origination fee is based on 2.00% - 6.00% of the entire loan amount. Residents of Iowa and the U.S. territories are not eligible for a loan.

LendingClub assigns the most competitive interest rates to borrowers based on three key factors:

  • A borrower’s credit rating
  • The amount borrowed
  • A borrower’s debt-to-income ratio (DTI), or how much is owed to other creditors compared to income

Prosper

Like LendingClub, Prosper also doesn’t charge borrowers a prepayment penalty. Its origination rates vary from 2.41% - 5.00%. Borrowers can generally expect to receive their funds within three business days of accepting an offer.

This P2P marketplace might be an appropriate choice for a borrower with a low credit score. For example, if you have a credit score of at least 600 and no bankruptcies on file, Prosper will let you apply for a co-borrower loan as long as the second borrower has a credit score of at least 640. In general, to qualify for a Prosper loan, you’ll need the following:

  • A minimum 640 FICO Score
  • Less than five hard credit inquiries within the last six months
  • Annual income greater than $0
  • A debt-to-income ratio of no more than 50%
  • At least three open credit accounts
  • No bankruptcy filings over the past 12 months

Upstart

Compared with the other platforms described above, Upstart offers the lowest APR rates and the largest loan amount, up to $50,000. It also claims to provide next-day funding, by depositing loans into most borrower accounts in one business day. Depending on the state where you live, minimum loan amounts will vary, from $3,100 to $7,000. Upstart charges origination fees Up to 8.00%, as well as a fee if a borrower is more than 10 days late with a loan payment.

Upstart looks for borrowers with the following qualifications:

  • A minimum FICO Score of 600 (you may still qualify if you don’t have enough credit history to produce a FICO Score)
  • Low debt-to-income ratio
  • No bankruptcies or public records
  • No accounts currently delinquent or in collections
  • Less than six hard credit inquiries over the past six months (other than inquiries for student loans, vehicle loans, or mortgages)

What if your loan isn’t funded?

If your application to a P2P lender is denied, you’ll receive a notice that provides the specific reason (or reasons) for the denial. For example, many P2P marketplaces require a minimum FICO Score in the low-600 range just to be considered for a loan.

Even if you have a good credit score — generally anything over 670 — your application might still be denied if you have any of these issues:

  • Problems verifying employment: A stable job and income are strong signs that you’ll most likely be able to pay your lender back. If a lender has trouble verifying your employment history, your application may get declined.
  • Not enough income: Lenders typically check to make sure you have enough income to pay back both existing debt and any new loan. If your debt heavily outweighs your income, your lender will most likely deny you any new credit.
  • Bankruptcy: Lenders are often wary of approving a loan after an individual has filed for bankruptcy. A bankruptcy may stay on your credit report for up to seven or 10 years, depending on the type filed.
  • Credit card utilization: If you are using a large percentage of the credit that’s made available to you, you may be seen as a potential risk to lenders.

If a P2P marketplace does deny your loan application, check your credit report to make sure no inaccuracies are dragging down your credit score. You can check your credit report for free every week for the next year at AnnualCreditReport.com, a government-mandated website that collects scores from the three major credit reporting agencies, Equifax, Experian and TransUnion.

Also consider reviewing your loan application to ensure you filled it out completely and accurately. If you do find errors in either your credit report or application, correct them and apply again. Otherwise, take a look at your denial notice and see if there is anything you might be able to do to turn yourself into a desirable loan candidate.

It might be a matter of paying back enough existing debt — like high credit card balances — or steering clear of opening new credit accounts. Or it might simply mean setting up a better budget and paying bills on time. After all, your payment history accounts for as much as 35% of your FICO Score, so consider setting up payment reminders to avoid missed payments.

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30% of Working Parents Are ‘Terrified’ of Losing Job While Balancing Child Care

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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With schools across the U.S. still struggling with reopening plans, many districts are turning to fully remote learning to begin the fall semester. This means working parents are having to manage both child care and jobs for longer than expected.

That could be troublesome, as a new MagnifyMoney survey of more than 1,000 parents reveals that the struggle to juggle child care with work has 3 in 10 employed parents “terrified” of losing their job. Our survey also reveals that parents of color and women are in a particularly bad position and are more likely than their white male counterparts to report less flexible employers.

Key findings

  • Three in 10 working parents are “terrified” of losing their job as they try to balance child care amid the pandemic. Men are more worried than women, while Black and Hispanic parents are more worried than white and Asian parents.
  • The lack of affordable child care causes concern, as 35% of working parents say they’re unable to afford a nanny or caregiver to care for their child while they work, despite wanting to do so. Meanwhile, 32% of all parents are at least considering taking on debt to cover child-care costs.
  • More than a third of working parents are contemplating job changes to aid them in caring for their child as the pandemic disrupts the school year.
  • Men are more likely than women to report their employer was very flexible as they work and care for their child — 52% and 41%, respectively. Also, working women are much more likely to say they’re staying home with their child while their partner works.
  • Parents of color face disproportionate challenges, as 12% of working Black and Hispanic parents feel completely unsupported by their employer’s lack of flexibility, compared with 5% of white parents and 3% of Asian parents.
  • Nearly 7 in 10 parents believe the government should provide child-care stipends to working parents amid the pandemic. Similarly, 36% said another round of stimulus checks would solve their child-care problems completely.

Working parents are terrified of losing job amid pandemic

Our survey found that (30%) of working parents are terrified that they will lose their job while trying to balance work with caring for their child amid the COVID-19 pandemic. Black parents (40%) and Hispanic parents (33%) are much more afraid of losing their job when compared with their white (29%) and Asian counterparts (27%).

Here’s a sampling of what we found for current working situations among working parents:

  • Full time from home (33%)
  • Full time on-site at employer (21%)
  • Split between remote and on-site work (8%)

While many parents are worried about losing their job while juggling child care, we found that more than half (55%) of parents prefer to work from home now. This could be attributed to concern over being exposed to COVID-19 in the workplace or parents who can’t afford child care.

Looking at parents’ child-care plans for the fall, we discovered:

  • 41% said they will stay home with their child
  • 13% said at least one child is old enough to be left alone, so they don’t need child care
  • 12% said the child’s other parent will stay home

Notably, only 6% of parents will send their child to day care, and only 3% will hire a nanny or babysitter.

Not only will having to care for a child while working impacts how parents feel about job security, but it affects the course of their career path, too. Our survey found that to care for their child as COVID-19 disrupts the school year:

  • 18% of parents said they have or plan to reduce their hours at work
  • 12% have or plan to quit their job
  • 10% have or plan to switch to a more flexible job

We found that millennials (those ages 24 to 39) and single parents, in particular, were most likely to contemplate a job change due to the pandemic. This is particularly alarming, as it suggests younger workers and workers that may be more financially vulnerable are being forced to make changes that could stunt their career growth due to COVID-19.

Women, parents of color affected hardest by COVID-19 disruptions

Our survey discovered that not all working parents have been equally affected by the COVID-19 pandemic disruptions. Instead, women and parents of color are having a particularly difficult time when it comes to getting support from their employer.

When asked how flexible their employer has been while they care for their child while working, 14% of survey respondents said their employer was somewhat flexible, while 7% said their employer wasn’t flexible, leaving them feeling completely unsupported.

However, that number jumps to 12% of Black working parents and 12% of Hispanic working parents who feel unsupported by their employer. That’s a stark comparison to the 5% of white working parents and 3% of Asian working parents who said the same. As noted before, Black and Hispanic working parents were also much more likely than their white counterparts to fear losing their job due to balancing child care and work.

Additionally, many of our findings suggest that the burden of child care largely falls on the woman’s shoulders, although it’s worth noting that we didn’t ask the gender identity of the respondents’ partners.

For example:

  • More than 3 in 10 male respondents said their partner was working full time from home
  • Almost 4 in 10 female respondents said their partner was working full time and on-site at their employer

Meanwhile, we also found that women were more likely than men to say they planned to stay home with their child in the fall. Yet, at the same time, women were more likely than men to say they felt unsupported by their employer (9% versus 5%).

Overall, our findings underscore that parents of color and working mothers are facing more challenges when it comes to balancing child care and work amid the pandemic. This is especially troublesome, as it could widen the wealth gap between people of color and their white peers — as well as the wealth gap between men and women — if the challenges end up adversely impacting their careers.

Working parents are struggling financially, too

Our survey found that not only are working parents struggling to balance the demands of their job and child care, but many are struggling financially, too. This adds an extra layer of difficulty to the problems caused by the pandemic. We found that more than half of parents reported losing at least some of their income due to the pandemic.

We found that 35% of parents want to hire a nanny or caregiver to take care of their children while they work, but can’t afford to do so.

In fact, 32% of parents are at least somewhat considering going into debt to find child care for the fall semester. Of those parents considering going into debt:

  • 36% are considering taking on $1,000 to $2,4999 of debt
  • 29% are considering taking on $2,500 to $4,999 of debt

While hopes for another coronavirus relief package are starting to fade, our survey found that many working parents think they would benefit immensely from some sort of financial relief. Our survey reveals that 69% of respondents think that the government should provide working parents with child care stipends amid the pandemic.

Additionally, 70% said a second economic impact check would help at least a little bit with their child care concerns. This could potentially allow some consumers to put some of the money in a high-yield savings account, too.

Methodology

MagnifyMoney commissioned Qualtrics to conduct an online survey of 1,019 parents of children younger than 18. The survey was fielded July 31-Aug. 3, 2020.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Investing

401(k) Match Suspensions May Cost Workers $13 Billion Over Next Year

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Workers in nearly every industry have been impacted by the coronavirus pandemic, with the unemployment rate hitting a new high in 2020 of 14.7% and pay decreases becoming typical.

Now, a study from MagnifyMoney estimates that workers may lose $13 billion over the next 12 months as employers suspend matching contributions to 401(k) and other defined contribution plans. At retirement, that would cost workers a total of $58.8 billion based on a 6% annual return.

According to a Plan Sponsor Council of America (PSCA) survey of employers, 16.1% of respondents indicated they were planning to suspend company-match programs this year amid the coronavirus crisis.

Key findings

  • Workers may lose $13 billion in matching contributions to their 401(k) and other defined contribution plans over a 12-month suspension should 16.1% of employers suspend retirement benefits. To put that into context, the company-match losses would be more than double as costly than the $5.7 billion Americans lose annually to early withdrawal tax penalties (prior to 2020).
  • The average company match lost to a 12-month suspension would be $1,134, and it would impact 11.4 million workers.
  • While younger workers typically have lower wages (and thus a lower match), the suspension hits them hardest, as they lose the opportunity to grow that match over their career. At a 6% compound annual growth rate, losing a $1,000 match at age 25 would mean $10,903 less in retirement at age 65.
  • A 30-year-old millennial with a median income of $40,000 potentially has more to lose at retirement from a suspended company match than Generation X and baby boomer co-workers, despite the lower income. At a 6% compound annual growth rate, the $1,106 match they lose would have grown to $8,504 at age 65. The lost match of $1,338 for a 54-year-old Gen Xer with a higher income of $51,571 grows only to $2,540 when they turn 65.

Millennials hit hardest by 401(k) match suspensions

More than 58 million Americans were active 401(k) participants in 2018. By the end of the first quarter of 2020, 401(k) plans held an estimated $5.6 trillion in assets. Now, as more employers are set to suspend matching 401(k) plans, many Americans will have less money going into those plans.

Many millennials entered the workforce during the Great Recession, when they experienced diminished job prospects and depressed wages that left them challenging obstacles at a young age. Now, they face another blow from an unprecedented economic disruption. While millennials would lose less ($4.9 billion) in a year from company-match suspensions than Gen Xers ($5.4 billion), they would have a lost opportunity cost almost three times higher than Gen Xers.

In total, at a 6% match rate, millennials may miss out on $29.7 billion in lost opportunity cost, which is more than:

  • Gen Xers at $10.3 billion
  • Generation Zers at $5.1 billion
  • Baby boomers at $0.8 billion

Take a 24-year-old millennial, for example. If they have a median income of $27,000 and lose a company match at a 6% annual growth rate, that $710 lost match could grow to $7,745 by the time they reach age 65.

On the other side of the millennial spectrum, a 39-year-old with a median income of $50,000 would see an average loss of $1,341 — or $6,101 by retirement age.

Since employers are only required to give 30 days’ notice before reducing or suspending contributions, some workers may lose their matches sooner rather than later.

How other generations are affected by 401(k) match suspensions

No generation will be immune to the financial toll of the coronavirus pandemic. As the youngest adult generation in the workforce, Gen Zers have lower median salaries, with longer to work before retirement:

  • At a 6% match rate, 913,000 Gen Z employees would face $444 million in lost matches in the next year and $5.1 billion in lost opportunities by age 65. A 20-year-old with a median income of just over $14,000 may lose just $380 in match suspension in a year, but — over time — that figure could have grown to $5,229 by the time they hit 65.
  • A 45-year-old Gen X employee may have a higher income of $50,100 and a lost match of $1,300. By age 65, however, that figure could have grown to $4,170. Gen Xers stand to lose a total of $10.3 billion in opportunity cost.
  • The 1.9 million baby boomers facing match suspensions will lose $2.2 billion in matches and $783 million in opportunity cost. A 60-year-old making $50,000 would lose $1,140 in a year, totaling just $1,526 lost when they reach retirement in five years.

Why saving for retirement earlier matters

Ken Tumin, founder of DepositAccounts, said it’s crucial to save early for retirement. “Starting early gives you a big advantage in building sufficient retirement savings for financial independence,” Tumin said.

He also said that, during a pandemic, 401(k) account holders may need to adjust their contributions if they face unexpected expenses or reduced income. Expect the unexpected by paying down debts and budgeting for an emergency fund, he said.

To recap, here are the reasons why saving for retirement early matters:

  • Build compound interest: Contributing even a small amount to your 401(k) will add up over time, potentially resulting in thousands of dollars saved by the time you retire.
  • Provide flexibility: If you’re going through a financial rough spot, starting early may allow for more flexibility to temporarily contribute less.
  • Prepare for income fluctuations: By setting aside money early, you’ll continue to watch your money grow even if you lose a job, are furloughed or are facing a pay cut.

Methodology

In May 2020, MagnifyMoney estimated the impact that company-match suspensions may have on American workers during the COVID-19 pandemic, based on recent surveys, income levels and participation rates of workers with access to 401(k) and similarly defined contribution retirement savings plans. Wage, contribution and match estimates are based on data from the Bureau of Labor Statistics (2019), the 2018 American Community Survey by the U.S. Census, the Plan Sponsor Council of America (2020), Fidelity Investments and Vanguard (2019) and the Stanford Center on Longevity (2018). Assumptions are based on a typical company match of 50% of the first 6% of employee contributions, or 3% total. Calculations presume a 12-month company-match suspension and a 6% compound annual growth rate.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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