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Updated on Tuesday, October 9, 2018
If you want to take out a personal loan, turning to a peer-to-peer (P2P) lender could be a good option. These lending platforms help connect borrowers who need a loan with investors who want to lend out their money and earn interest.
When you apply and are approved for a loan with a P2P lender, your loan is listed on the lender’s website. Investors, which can range from individuals to companies, can then put up money to fund part or all of your loan. Technically, the money from investors isn’t sent directly to the borrowers. But investors will receive payments (minus the P2P lender’s fees) as you repay your loan.
Before you can get your loan listed, you’ll submit an application to determine if you’re eligible for funds and for what terms.
Here are a few tips that could help you qualify for a P2P loan, along with a discussion of the general pros and cons of P2P lenders.
5 tips to help you qualify for a peer-to-peer loan
1. Make sure you meet the minimum eligibility requirements
Each lending platform sets its minimum eligibility requirements for applicants. Generally, you can expect the following factors to be considered as you apply:
- Your credit history and credit score
- Your income and outstanding debts
- Your history with the P2P lender
- Whether you’re at least 18 years old
- If you live in a state where the lender operates
- If you have a bank account
To qualify for funds on Prosper, for instance, you must have a debt-to-income ratio that’s below 50 percent, at least some income and fewer than five credit inquiries during the past six months.
Alternatively, LendingClub‘s minimum credit requirements is not specified and maximum debt-to-income ratio of 40 percent, which may make it a better option for some borrowers.
Meeting the minimum qualification requirements doesn’t guarantee that you’ll get approved for a loan. But knowing what the qualifications are upfront lets you avoid applying when you don’t have a chance of getting approved.
2. Try to get a preapproval with a soft credit pull
Some P2P lenders offer loan preapproval with a soft credit check. Unlike a hard credit check, a soft pull won’t impact your credit score.
Although getting preapproved doesn’t guarantee that you will get approved for a loan with the same rate and terms, it could be a quick and easy way to see if you meet the basic credit requirements.
3. Consider how much you need to borrow
Most P2P lenders set minimum and maximum loan amounts. For example, Prosper offers loans from $2,000 to $40,000, while LendingClub offers loans from $1,000 to $40,000. Even if you meet the P2P lender’s requirements, you may only qualify for a lesser amount depending on your creditworthiness.
Before applying, make sure your desired loan amount falls within the lender’s range. If you need to borrow more than the lender allows, you may want to turn to a different lender or type of loan. For example, you could apply for a personal loan for up to $100,000. Or you may find that it’s easier to get approved for a large secured loan, such as a home equity loan.
4. Prepare your paperwork and verification documents
P2P lenders may require a variety of verification documents to complete a loan request. Having these on hand when you apply could help you quickly get through the application process.
The specifics can vary by lender, but needed documents may include:
- Recent pay stubs, bank statements and tax returns
- A copy of your driver’s license or other government-issued ID
- Proof of your current address from a recent utility or telecom bill
5. Look for ways to improve your credit score
If you don’t meet the lender’s minimum credit score requirement or think you may be able to get a lower rate with a better credit score, you could try to improve your credit before applying for a loan.
Improving your credit takes time, but if you can find and dispute errors on your credit report, that could lead to a quick change. Another option is to pay down your revolving debt, such as what you owe on credit cards.
Some P2P lenders may also allow joint applications. You can get approved for a loan by applying with a creditworthy cosigner. But both borrowers would be legally responsible for repaying the debt.
P2P lending: Pros and cons
Pros of using a P2P lender
Online P2P lenders may have straightforward application and verification processes. Working with a P2P lender could be easier and quicker than having to go into a credit union or bank branch to complete a loan application.
Although your interest rate will vary depending on your creditworthiness and the P2P lender, you may be able to find lower rates with a P2P lender than from other financial institutions. That’s not guaranteed, though, so you should shop around before taking out any loan.
While P2P lenders generally require a credit score of 600 or higher, that’s a lower cutoff point than some other online lenders. A low score may mean you don’t get the most favorable rates, but at least you may still be able to qualify for a loan.
Many P2P lenders only offer fixed-rate installment loans. With a fixed-rate loan, you’ll know exactly how much your monthly payments will be and when your loan will be paid off. Using a P2P loan to pay off higher-interest revolving debt, such as credit card debt, could help you save money and stick to a set repayment schedule.
While P2P lenders may ask you why you want to take out a loan, you can legally use the money for almost anything. There may be some exceptions, though. For instance, you may not be able to use the funds for investments, illegal activity or to make higher education-related purchases.
Cons of using a P2P lender
You may have to pay an origination fee when you receive a loan from a P2P lender. The fee amount is often a percentage (such as 1 to 6 percent) of your loan amount and may vary depending on your creditworthiness. Origination fees are taken out of your loan and you’ll receive the rest of the money but need to repay the full amount. You should take this into account when you’re considering how much money you want to borrow.
A P2P lender may not be the best option if you need money right away. With other lenders, once your application is approved and your information is verified, the lender can send you the money. With a P2P platform, you’ll need to wait until investors fund your loan. This doesn’t necessarily take a long time — LendingClub says the entire application and funding process typically takes about seven days — but it’s something to consider before applying.
Even if you get approved for a loan, there’s no guarantee that investors will decide to invest in and fully fund your loan. Depending on the P2P platform, you may be able to accept a smaller loan for the amount that was funded. Or you may have to reapply and have your loan request relisted.
Don’t overlook these loan details
As with any contract, you’ll want to carefully review the loan documents before signing. There are a few fine-print items that you may want to pay particularly close attention to with peer-to-peer loans. Some of these you may be able to research ahead of time and then double-check when you receive an official loan offer.
- Loan rate: The annual percentage rate (APR) on your loan takes origination fees, compounding interest and your loan’s terms into account to show your true cost of borrowing. You should compare the APR you’re offered by different lenders when considering which loan offer to accept.
- Loan fees: P2P loans may have an origination fee, late payment fee, check processing fee, insufficient funds fee or other types of charges. Read over the loan’s terms carefully so you’ll know when and why you’ll have to pay a fee, and how to avoid paying them. If your loan has a prepayment penalty or pre-computed interest, you may want to look for a personal loan from a different lender.
- What happens if your loan isn’t fully funded: Because P2P lenders may treat partially funded loans differently, know what could happen before you decide which lender to work with to try to get a loan. If you have a short deadline for when you need the loan, you may want to consider a non-P2P lender.
Where to compare P2P lenders
You can compare P2P lenders and other lenders that offer similar types of loans by visiting each financial institution’s website. But you could also use our personal loan marketplace to review each lender’s loan terms, rates, fees and minimum credit score requirements.
Using our marketplace, you can input your credit score, desired loan amount and ZIP code to view lenders that suit your needs.