Peer-to-peer loans are a subset of crowdfunding, given that they still have to do with the fact the investors pool together to manage risk. Thus one investor may spread his or her P2P lending investment around to several or even a large number of peer-to-peer loan requests in a certain area. S/he may want to help a certain group, whether single parents, young homeowners, those with a certain cultural background, or retirees. Or s/he may want to help with certain P2P lending projects such as adoption expenses, weddings, or travel.
The Economist recently had an article about peer-to-peer lending, and The Credit Union Times predicts growth in the P2P lending market. The Economic Times covers P2P lending from the investor perspective, while Lendio covers P2P loans from the applicant side.
In this post, we also provide an overview of peer-to-peer loans.
Major Types of Peer-to-Peer Loans
The following are the major types of peer-to-peer loans available.
Peer-to-peer loans for business 
Peer business loans provide the funding for a business, whether for a start-up, a small business expansion, or improvements in process. Peer-to-peer loans for businesses may have a more detailed application process since they may be seen as higher risk by investors who want to know why the business will be successful after this capital infusion. P2P loans for business may sometimes also involve some equity transactions and may look a little like crowdfunding. Sometimes, investors are asked for a new round of funding after the first round proves successful.
Peer-to-peer loans for personal reasons
Peer personal loans are perhaps the best-known and most popular form of this type of transaction. In this case, an individual applies for money from peer investors, and just like a more traditional personal loan, she or he must give information about her or his financial history, the reason for the loan, employment history, etc. Credit scores and other relevant financial information are provided to potential investors.
Many investors in peer-to-peer loans for personal reasons choose to spread their investments over many loan requests. However, some platforms are also designed to be a go-between when family or friends want to make a loan to someone but do not want to have to get into enforcing the terms. These loans might be used for anything from debt consolidation to important events to specific needs (home repair, adoption, etc.)
P2P loans for students
Peer loans for education are also increasingly popular. As the name suggests, they help a student afford higher education costs, including college and graduate school. A subset of peer-to-peer loans for education are made to help someone afford job training or learn a trade. Peer-to-peer student loans often cover expenses after traditional loan options are exhausted or when traditional loans are not favorable after a certain point. This type of peer-to-peer loan may sometimes be mission motivated, where an investor has a particular type of student she or he likes to support, or it might merely be a choice of how the lender feels they will get the best payback.
Peer-to-Peer Loans for Bad Credit
Peer-to-peer loans for bad credit applicants may be your only choice if the bank or other traditional lender decides not to extend you a loan. The P2P loan marketplace may be more forgiving of past financial challenges and more willing to extend a loan. The reasons for this include the fact that many people investing in P2P loans are willing to take a deeper and less formulaic view of each application, and individual investors may be more tolerant of risk. That said, peer-to-peer loans for bad credit come with significantly higher interest rates, as you might expect. Then again, P2P loans for bad credit may be the only viable option for many.
As an investor, you might put your money into peer-to-peer loans for bad credit for several reasons. First, you may be willing to take the risk because of the higher return. Second, you may have a mission-driven reason for being willing to invest in a certain group, such as military members or people with a similar background. And finally, you may also have a mission-driven reason to pursue a certain reason why the applicant is looking for a peer-to-peer loan for bad credit, such as their desire to install green energy systems or their hope to start a small business.
Peer-to-Peer Loans: Advantages
There are some obvious advantages to peer-to-peer loans. Of course, a lower interest rate than you would pay from a bank is the most important in many cases. In some, it would be almost impossible to get these kinds of peer-to-peer loans from a bank in the first place. But even if the interest rate is approximately the same as one you would get for a bank on similar person-to-person loans, there are other reasons as well, such as:
Relationship Building
Peer-to-peer loans form a relationship with the investors in many cases. Sometimes this relationship can lead to either similar investments in the future or increased investments for the same project. In other words, the crowd will be more likely to invest in you in the future if you show that your purpose is worthwhile and that you keep to the terms that you agreed to.
Flexibility of Peer-to-peer Loans
Peer-to-peer loans can have more flexible terms than traditional loans. For example, peer-to-peer loans may have flexible or specially tailored repayment schedules. They may have terms such as gradual repayment that make the initial payments less. You and the crowd can tailor the terms in a way that makes the most sense.
Better Terms
Peer to Peer loans can sometimes include some reduced rate or even free money if the project is charitable or in exchange for certain perks. You may be adopting a child, rebuilding an area hit by a natural disaster, or part of a group facing a challenge the investors want to help.
Other advantages may be more specific to your situation, purpose, or background.
Peer-to-Peer Loans: Disadvantages
Of course, this peer-to-peer lending review will also cover drawbacks as well. For example, a bank will guarantee that they will pay any installments on time and with the original terms throughout your project, while peer-to-peer loans may depend on how long the crowd can afford to continue to fund you. Also, P2P lending, for personal reasons, will still have higher rates than other types of crowdfunding. You still will have to afford to pay back what could be a large payment. And finally, there could be something of an intrusiveness factor involved with peer-to-peer lending. The investors may require more ongoing information – they might want to provide feedback along the way.
Summary and Conclusion
Peer-to-peer loans are a strong and growing subset of crowdfunding. We believe it may grow in popularity through word of mouth and increasing advertisement and promotion. The advantages of these peer-to-peer loans may outweigh the drawbacks in many cases. The number of investors may grow as people try it and see how fruitful it can be. Best of luck if you do pursue investing in or applying. We do not usually take much of a role with these instruments when the loans are relatively small. However, if you are an entrepreneur looking for a combination of loans and equity for your project and are interested in turning to a crowdfunding platform for a significant raise, we can help.
