How does peer to peer lending work?

How does peer to peer lending work?

To help best explain the process as an investor, it’s helpful to understand how borrowers interact with the marketplace as well. Below you’ll find perspectives for both parties.

Borrower Perspective

  1. Learn about a p2p marketplace through advertising or word of mouth.

  2. Go to the marketplace’s website and submit an application for a loan.

  3. Marketplaces carefully review the borrower’s credit history, employment information, and other relevant details and provides a (usually instant) message of approval or decline.

  4. If the borrower is approved, they may be required to submit documents to verify their identity, residence, and/or income.

  5. The marketplace will then make a final credit decision and make the loan available for investor funding or decline the application if the borrower cannot produce the required documents or a final review of the application indicates other risks.

  6. The borrower will then wait up to two weeks (usually much faster) for their loan to become fully-funded by investors and the money, less an origination fee charged by the marketplace will be deposited into their bank account.

  7. The borrower will make fixed payments each month until their loan is paid off. Some borrowers decide to pay off their loan early in order to save on interest expenses.

  8. If the borrower fails to make on-time payments, their loan may fall into a late, defaulted, or charged-off status. Marketplaces utilize a variety of internal and external collections and legal processes to collect outstanding amounts owed in the event the borrower falls behind on payments.

Investor Perspective

  1. Investors sign up on a marketplace’s website to become a lender

  2. Link a bank account in order to fund your investment account

  3. Once the money clears in the marketplace account (may take 4-5 business days), investors may then commit money towards hundreds or even thousands of different loans available from the marketplace.

  4. Marketplaces provide investors with access to hundreds of different credit attributes about the borrower who is requesting the loan. Investors can choose which loans they would like to fund.

  5. A key principle of p2p that we will also cover later in this course is diversification. To avoid lending your entire investment to one borrower who may default, lenders strategically invest small amounts of money (typically in $25 increments) across hundreds or thousands of different loans.

  6. Once the loans originate and the money is sent to the borrower, payments will be made starting about 30 days later and will add to the investors’ available cash balance.

  7. Investors will then reinvest their monthly payments into new loans or withdrawal some or all payments for income or other purposes.