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?
• P2P loan pros and cons
• How to apply for a peer-to-peer loan
• 3 peer-to-peer lending marketplaces
• What if your loan isn’t funded?

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:

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.

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.

Both SoFi and LendingClub are nontraditional lending companies. Where SoFi is an online-only lender, LendingClub is a peer-to-peer lending marketplace. This means you’ll encounter slightly different application processes. But the two also vary between personal loan terms and qualification requirements.

SoFi personal loans have a higher credit requirement but come with lower APRs, higher loan amounts and longer terms compared to LendingClub. If you have a fair to good credit score, or you’re only seeking to borrow a small amount, however, you may find LendingClub personal loans to be a better fit. Keep reading to learn about how these two loan products compare.

Comparing SoFi vs. LendingClub personal loans

APRs

• SoFi: 5.99% to 22.56% (with AutoPay)
• LendingClub: 10.68% to 35.89%

SoFi personal loans offer a dramatically lower range of APRs. They also don’t charge additional fees and offer a 0.25% interest rate reduction if they sign up for AutoPay. While the APR range offered by LendingClub is higher, it includes an origination fee of 2.00% - 6.00% of the total loan amount.

The cost of taking out a personal loan could add up quickly over time depending on your APR. If you took out a $30,000 personal loan from SoFi at the minimum 5.99% APR over a 24-month period, your minimum monthly payments would be $1,329.48. The total amount you’d have to pay back would be $31,907.60, which includes $1,907.60 in interest.

In comparison, borrowing the same amount from LendingClub would require a minimum term of 36 months and a minimum APR of 10.68%. You would end up paying $5,194.38 in interest over the life of the $30,000 loan, although your monthly payments would be lower at $977.62.

Loan amounts

• SoFi: $5,000 to $100,000
• LendingClub: $1,000 to $40,000

Personal loans through LendingClub start with a low minimum amount, allowing you to potentially borrow for smaller expenses. Although SoFi has a much higher minimum borrowing amount, their high maximum borrowing limit could be handy for larger home renovation projects, wedding costs and other similarly pricey expenses.

Loan terms

• SoFi: 24 to 84 months
• LendingClub: 36 or 60 month terms

Flexibility in loan terms can be an important factor for borrowers to consider. While a shorter loan term comes with higher monthly payments, it’ll save you money on interest compared to a longer term. The reverse is true for a long term: You’ll see lower monthly payments but a higher overall interest cost. Take this, as well as your personal loan needs, into consideration when comparing loan terms.

Minimum credit scores

• SoFi: 680
• LendingClub: Not specified

Though SoFi offers a lower minimum APR and more flexible repayment terms, they can be harder to qualify for, requiring good or better credit. LendingClub is open to fair credit borrowers.

Fees

• SoFi: No origination fee
• LendingClub: 2.00% - 6.00% origination fee

Some lending companies charge an origination fee to process your loan. This fee is either deducted from your loan funds or added on top of your balance. SoFi doesn’t charge any fees. LendingClub comes with an origination fee, plus a late payment fee equal to $15 or 5% of the unpaid payment, whichever is greater.

Prequalification process

• SoFi: Soft Pull
• LendingClub: Soft Pull

Both SoFi and LendingClub do a soft credit pull during the prequalification process. This does not affect your credit score. But if you choose to submit a formal application, you’ll need to approve a hard credit inquiry, which will lower your credit score slightly.

Prequalification allows you to see whether you’re liable to be approved for a loan and for what kinds of terms. During this process, you’ll submit basic information about yourself, such as your Social Security number and income information, and your desired loan.

Eligibility requirements

To be eligible for a loan with either lender, you must be at least the age of majority in the state where you live. You should also be a U.S. citizen, permanent resident or visa holder and be able to provide requested paperwork. For both lenders, your eligibility will depend on a number of factors, including:

• Your credit score
• Financial history
• Monthly income
• Expenses including other debts (known as your debt-to-income (DTI) ratio.

To get a personal loan from SoFi, you should demonstrate sufficient income (from either yourself or a cosigner) and either steady employment or an offer to start employment within the next 90 days. If you already have one or more loans with SoFi, you must have made your last three payments on time. Residents of Mississippi are not eligible, while Michigan residents may only have one loan from SoFi at a time.

Borrowers who apply for a loan through LendingClub must have a verifiable bank account. If you live in Iowa or the US territories, you are not eligible to apply. Certain applicants may be eligible for a joint application loan.

Application and time to funding

The application processes for both companies are completed entirely online.

With LendingClub, the application process includes verifying your income through bank statements, tax forms or pay stubs, as well as your employment by providing your work email. You may also be asked to confirm your identity and current address through providing government-issued photo ID and utility bills. LendingClub loan processing times are fairly quick; once approved through LendingClub, your loan will need to be funded by investors. For most borrowers, you could get the funds deposited directly into your bank account within four business days.

After completing a loan application and being approved with SoFi, you will be sent an official agreement requesting your electronic signature and receive a phone call to confirm your address. You can expect to receive the funds of your SoFi personal loan within a few days of approval. (Unfortunately, SoFi doesn’t provide more specific details on their website.)

Flexibility and perks

• SoFi: Unemployment protection; no-cost financial planning; exclusive discounts and deals; networking opportunities
• LendingClub: Ability to change payment due date; grace period on late payments; natural disaster protection

If you lose your job, SoFi could temporarily pause your monthly payments and provide you no-cost career coaching to help you get back on your feet. Other perks offered by this lender include no-cost financial and estate planning, exclusive deals and discounts and invitations to networking experiences.

LendingClub offers the option of changing or permanently moving your payment due date.There is also a 15-day grace period to make payments without penalty. If you’ve been affected by a natural disaster, LendingClub will not charge late fees or make payment calls for at least 30 days. They’ll also inform credit bureaus of your special circumstances.

Is SoFi or LendingClub better for you?

When SoFi might be a better option

• Your credit score is high enough to benefit from lower APR rates.
• You need to borrow more money (over $40,000).
• You don’t want to pay origination or late payment fees.
• You will need a longer period of time to pay back the loan.
• Your line of work is unstable and you could benefit from added unemployment protection.
• You are interested in added perks like no-cost career coaching.
• You could benefit financially from the loan referral program.

When LendingClub might be a better option

• You only need to borrow a smaller amount.
• Your credit score is not high enough to qualify for lower APR’s.
• You are a resident of Mississippi.