Peer-to-Peer vs. Person-to-Person Loans. Which is Better?
Technology has enabled more users to obtain loans quickly and easily online. Removing banks from the process, peer-to-peer and person-to-person lending are growing in popularity with consumers.
According to Transparency Market Research, the peer-to-peer market (also known as P2P) is estimated to reach nearly $900B by 2024 and person-to-person lending taps into the existing off-the-books friends and family personal lending estimated at $288B annually with individual loans averaging about $3200.
Both peer-to-peer and person-to-person loans provide borrowers with access to funds when traditional bank loans may be out of reach. Common P2P platforms include Lending Club, Prosper and Upstart while LendAmi is classified as a person-to-person platform.
Both peer-to-peer and person-to-person options attract borrowers who need money for credit card or debt consolidation, auto purchases, student loans, home improvement, medical bills, business funding and personal loans.
What are the differences?
In a nutshell: peer-to-peer platforms use a middleman to dictate the terms of the loan and match lender investors with qualified borrowers. Person-to-person platforms are relationship-based and used by people who already know each other to mutually agree to loan terms and then track it together.
Peer-to-peer platforms allow individuals and groups of investors to make a profit by loaning their own money to borrowers. Lenders review borrower loan requests and choose to invest where they feel most comfortable.
Depending on the platform, qualified borrowers may be able to obtain loans upwards of $40,000 or more with minimums typically ranging from $1000 to $5000.
While offering increased access to collateral-free funds for borrowers, P2P platforms have some potential downsides:
- Credit Rating Matters. Low credit scores, recent bankruptcies, delinquencies and frequent inquiries into the borrower’s credit score are common disqualifiers. Other concerns are credit utilization and not enough income
- Higher Interest Rates. Interest rates may actually be higher than other alternatives for borrowers with low credit ratings. Typical ranges are 6% – 35%. Borrowers who prove themselves on a P2P platform to be a credible borrower can improve their score and qualify for lower interest rates
- Origination Fees. P2P loans may include an origination fee, typically in the range of 2 – 6%. A lower credit rating will result in a higher origination fee
- Approval not Guaranteed. Once submitting a loan application, the borrower awaits acceptance from lenders who are willing to invest in that loan
Unlike peer-to-peer, person-to-person platforms don’t have a middleman sitting between the borrower and investor determining credit worthiness, interest rate and payment schedule. In a person-to-person environment both borrower and lender already know each other and mutually determine the loan terms.
Parties to a person-to-person loan are most likely family members, good friends or colleagues. People who use a person-to-person platform do so because it helps mitigate the risk of the loan turning sour. An estimated 50% of verbally agreed to friends and family loans end in dissatisfaction due to incomplete or late payment and, in about 25% of cases, no repayment at all. Person-to-person lending platforms help solve this problem by documenting the loan terms, using bank ACH transfers to fund the loan and make payments and transparently tracking progress so both parties know the status of the loan.
The upside to person-to-person platforms:
- No Credit Check. Since borrower and lender know each other, there is no application or judgmental qualification process
- Friendly Loan Terms. Borrower and lender set the terms including interest rate and repayment terms. No middleman is involved
- Favorable Interest Rates. Borrower and lender agree to an interest rate that is typically much less than what a P2P platform or a bank will charge. The LendAmi platform, for example, allows users to choose interest rates as low as 2% while still maintaining the loan within regulatory guidelines
- Smaller Loan Amounts. P2P platforms require larger minimum loans while person-to-person provides the flexibility for microloans. Using LendAmi, parties can transact a loan as low as $50
- No late fees. Sometimes late payments happen. With no late fees and lender flexibility to forgive payments if desired, person-to-person platforms are a user-friendly environment for friends and family to transact a loan
- No Origination Fee. Origination fees on P2P platforms can cost the borrower hundreds of dollars alone. Person-to-person platforms like LendAmi do not charge an origination fee and instead a small per transaction fee to cover the cost of bank ACH transfers between parties