The rising cost of college tuition and other expenses has plagued students for years. Private bank loans are becoming increasingly hard to come by, and government loans require mountains of paperwork and red tape.
Enter peer-to-peer lending (or P2P lending) websites. Experts warn that it can be a risky undertaking for lenders, but, unlike a bank, it allows borrowers to appeal directly to lenders and explain their situation in as much detail as they want.
Say you needed an extra $5,000 to cover your living expenses at college. Maybe you missed the deadline to apply for federal loans, and the bank didn’t think you were a good candidate for a private loan. You could go online and set up a profile explaining why you need the money and how it will be used.
Lenders on the site might choose to invest in you, plus you can link your Facebook, MySpace, and other profiles to your borrower profile so that friends and family can pitch in, too. The site would serve as the intermediary for your loan, which you would pay back over time with interest.
Here’s an overview of five major P2P lending sites and how they work.
Lending Club is a leading social lending network. Borrowers with good credit can get personal loans at better interest rates than conventional funding sources such as banks and credit cards. There is a streamlined process between the source of funds (lenders) and the borrowers who need those funds.
Borrowers complete a personal loan request online and can instantly view the interest rate they qualify for (it’s free to check, but Lending Club does have strict credit standards, such as a minimum FICO score of 640, so there is a chance you won’t qualify). There are no hidden fees, and the interest rate is fixed for the full three-year duration of the loan.
How Does Lending Club Set Interest Rates?
Lending Club assigns each borrowing a credit grade. The first part is based on his or her credit score (the higher your score, the higher your grade). The second part is based on the borrower’s debt-to-income (DTI) ratio. A DTI ranging from 0 to 12.99% results in no adjustment. A DTI of 29% results in a downward adjust of 16 sub-grades. The third adjustment is made based on the amount of the requested loan. Lending Club offers each person a loan guidance limit based on your credit grade. I know, it sounds confusing. But Lending Club offers a short tutorial that shows you exactly how the formula works.
Approved borrowers can then list their loan request on the site, at the interest rate they qualify for. There is a two-week loan listing period during which lenders can review loan listings and decide to fund the borrowers. If a loan is not fully funded at the end of the two-week period, the borrower can decide to accept partial funding or relist the loan for another two-week period. Most loan requests receive full funding.
Lenders get the chance to help someone while making a return on their investment.
Lending Club lets you know exactly what you qualify for and lets lenders know exactly how much they will make. There is no guesswork. If you qualify, this might be the best way to go. And since Lending Club has high standards, you are more likely to get your full loan request filled. The lenders know you have good credit and are more willing to take a chance on you. And, Lending clubs fees for borrowers (.75% to 2%) are some of the lowest you’ll find.
Launched in the UK in 2005, Zopa stands for “zone of possible agreement.” It’s now available in the United States, the UK, and Italy with plans to expand into Japan. Lenders can sort by the borrower’s age, purpose of the loan, and other criteria. Borrowers range from parents trying to pay off medical expenses or their children’s education to business owners hoping to grow their business. There are also students seeking college loans.
Zopa has teamed up with several US credit unions to guarantee Zopa Certificate of Deposits (CDs), so borrowers and lenders must belong to one of Zopa’s partner credit unions (you can sign up online). Each time someone invests in a Zopa CD, a contribution is made to a trust account, which is passed onto the borrower (or borrowers) chosen by the investor. Borrowers only pay fees in certain situations, like if they bounce a check or fail to make a repayment on time.
Like Zopa, Prosper lets users borrow for a variety of reasons: debt consolidation, student loans, home improvements, and so on. Unlike Zopa, Prosper is U.S.-based so all lenders or borrowers must be U.S. residents. The website is affiliated with Web Bank, offering borrowers in every state except Texas and South Dakota a maximum interest rate of 36%. Lenders bid down the interest rate, taking into account the borrower’s personal history and other factors. It is the eBay of social loans.
So, how does Prosper.com prosper? Borrowers pay a one-time fee on funded loans from borrowers, and loan buyers pay an annual loan servicing fee. All of its loans are unsecured three-year fully amortized loans (meaning you pay off the interest and the principal simultaneously). Video tutorials show you how to create an effective profile.
Launched in the spring of 2008, Fynanz focuses on student loans and allows friends, family, alumni, and others to invest in education. Students can use a Fynanz OpenLoan to pay for tuition, room and board, travel, textbooks, computer equipment, and other education expenses. Like most P2P sites, interest rates are generally higher than a federal loan, but the number of people who compete to fund your loan and your academic performance both factor into your interest rate.
The repayment term (five, seven, or ten years depending on what you choose) is longer than Prosper.com, but borrowers can choose to defer payments while in school. There is also the opportunity to return the loan (interest-free) within thirty days of applying if you change your mind or find another way to cover expenses.
Also launched earlier this year, GreenNote.com has a fixed interest rate of 6.8% and a repayment term limit of ten years (however, there’s a six month grace period and students can defer payment for up to five years and interest accrues while the loan is deferred). Money is routed directly to the school on the student’s behalf, so it can only be used for the cost of attending your college (minus any financial aid you’re already receiving).
Unlike some P2P sites, GreenNote does not require a cosigner or a credit check, so almost any student is eligible with proof of enrollment. This site charges a 1% annual lender administration fee (paid by the lender) and a documentation fee of 2% with a $49 minimum (paid by the borrower). Individual lenders can loan as little as $100, but borrowers must raise at least $1,000 to secure a loan through GreenNote.
As with any loan, be sure to read the terms carefully and research all your options before signing up. P2P lending can be a good funding source if you’ve exhausted your other options, but if it sounds too good to be true, it probably is.