The past decade has seen an internet-fueled trend in peer-to-peer (P2P) lending. It's a form of financing that allows borrowers to obtain a loan from a group of individual lenders without going through an intermediary, such as a bank. Growth in the industry is set to go to new heights. According to a 2017 Bank of America study, 36% of adults said they used a P2P lending service. The global P2P market was estimated at $67.93 billion in 2019. And by 2027, the global industry was expected to climb as high as $558.91 billion according to a report from Valuates.
Up to now, the vast majority of P2P loans have been personal, used to finance home improvements or pay off credit card debt. But lately, the number of P2P lenders getting into the mortgage business has steadily increased.
Popular P2P Lenders
San Francisco-based peer-to-peer lender SoFi offers both mortgage and mortgage refinance loans in 29states and the District of Columbia, with more on the way. Another firm, National Family Mortgage, facilitates peer-to-peer home mortgage and re-finance loans among relatives.LendingClub Corp. has issued more than $60 billion in loans and has discussed plans to expand into mortgages. There's even a P2P specializing in the commercial and residential mortgage industry–LendInvest, based in the U.K.– that recently lowered its investor minimums (its loans are not available to U.S. borrowers at this time).
How It Works
The process of obtaining a P2P mortgage loan varies by company, but typically follows a pattern similar to that outlined by SoFi:
- The borrowerbegins an online application and receives pre-qualified interest loan amounts and interest rates.
- You choose the loan amount and interest rate most appropriate for you, complete the application and receive a letter of pre-approval for your loan.
- You submit your offer to the seller and close the loan. At this point, you upload your purchase agreement, lock in your interest rate, obtain a property appraisal and sign the final documents.
According to SoFi, typical mortgage loans close in 30 days or less.
Pros and Cons
Before applying for a P2P mortgage loan, it’s worth considering both the pluses and the minuses.
On the upside:
- P2P lenders tend to approve people with lower credit scores.
- Interest rates on P2P loans are often lower than those offered through a traditional lender.
- Service fees are often lower as well, reflecting the lack of overhead that P2Ps have.
On the downside:
- The time to process and approve the loan may be longer —possibly a product of a lower credit score and the need to vet borrowers more completely.
- Collection fees (for borrowers who don’t pay on time) can be very steep, eroding any interest advantage offered by this type of loan.
Who Benefits?
As we mentioned above, one of the advantages of using a P2P lender for a mortgage is that they tend to approve people with low or fair credit scores. This is something new homeowners, especially millennials, will likely appreciate. People who fall into these categories tend to be pushed out of the mortgage market. But with the rise in the P2P market, many people who have been locked out, including those who are starting to develop their credit histories, are finding ways to make homeownership a reality.
A Mix-and-Match Option
With so few companies offering P2P mortgages, some borrowers have turned to a hybrid strategy: They finance the down payment for their property with a P2P loan and the balance with a conventional loan. Obtaining a P2P loan and actually using it for a down payment are two different things, however. Be sure to check whether your mortgage company or bank will even accept the use of a P2P loan as a down payment.
The Bottom Line
The American P2P market is projected to be worth $558.91 billion by the end of 2027. While some critics have called the industry overhyped, there is a high likelihood that the mortgage loan footprint of P2P loan providers will grow. As more and more P2P providers compete for mortgage customers, this new type of loan is probably worth looking into in order to compare it to other, more conventionalloan sources. It could be a viable option for anyone who has difficulty obtaining conventional financing or for those with excellent credit who desire a simpler process and lower interest rate.
FAQs
What are the benefits of P2P lending for borrowers? Borrowers can often access loans with lower interest rates than traditional financial institutions, especially if they have a strong credit history. P2P lending also offers more flexible terms and quicker funding than traditional loans.
Which would be a good reason for a borrower to use a peer-to-peer lender? ›
The major benefits of P2P lending for individuals are: Lenders can enjoy returns several percentage points above those for a bank CD; borrowers enjoy similar cost advantages compared with rates at a bank or credit union.
What are the main benefits of P2P lending? ›
Finally, P2P lending provides a variety of benefits to both lenders and borrowers, including access to lower interest rates, increased lending opportunities, better returns for lenders, increased transparency and control, reduced default risk, increased financial system diversity, and convenience and accessibility.
How safe is P2P lending? ›
Is P2P lending safe? Peer-to-peer lending is riskier than a savings account or certificate of deposit, but the interest rates are much higher. This is because those who invest in a peer-to-peer lending site assume most of the risk that banks or other financial institutions normally assume.
What are the red flags for P2P? ›
Inconsistent Stories: If the reason for the transaction keeps changing or doesn't seem to add up, take that as a warning sign. Unusual Payment Requests: If someone asks for payment in the form of gift cards or through multiple small transactions, it's a significant red flag.
Is P2P loans legit? ›
Peer-to-peer loans can be a reasonable choice when traditional loans are not an option, or you think you can get better terms from a P2P loan. They are particularly beneficial for borrowers with good credit who can secure lower rates or for those who need funds quicker than what traditional banks typically offer.
What is the average return on a P2P loan? ›
Typical returns for P2P investors per year average at about 5 percent to 9 percent while some investors see 10 percent or more returns.
Is there risk in peer-to-peer lending? ›
The main peer-to-peer lending risks are: Yourself (psychological risk). Not enough diversification (concentration risk). Losing money due to bad debts (credit risk).
What are the risks of P2P payments? ›
It's also important to know that, even though they may be associated with your bank account, no fraud protections exist on P2P apps. Once you press send it's virtually impossible to get your money back. Impersonation scams: Criminals often persuade victims to send money by pretending to be someone they're not.
Why borrow from P2P? ›
P2P lending offers an alternative to traditional bank lending and can be beneficial for borrowers who may have trouble qualifying for a loan through a traditional lender. It can also offer borrowers with good credit scores a lower interest rate.
The pros of P2P transfers
P2P networks may also be more secure in many respects because they're encrypted and have fraud monitoring capabilities. Some apps and online solutions are even incorporating biometrics and automatic notifications for every transaction. P2P networks also offer anonymity.
Can P2P be trusted? ›
Despite these benefits, there are also risks involved in P2P trading every user should be keenly aware of before they decide to try their hand at it. Among the common risks traders face are fake proof of payment, chargeback fraud, wrong transfer, man-in-the-middle attacks, triangulation scams, and phishing.
Is P2P lending legal? ›
P2P platforms must operate in accordance with the rules meticulously outlined in the Reserve Bank of India's (RBI) Master Directions that set the stage for a responsible and secure lending ecosystem. P2P lending is unequivocally legal, given adherence to the regulatory framework.
Can you make money with P2P lending? ›
Monthly Income – Investors are paid every month when borrowers make payments on their loans. This means a solid portfolio of P2P loans can generate a steady stream of passive income. Higher Yields – Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields.
Can you make good money with P2P lending? ›
This means a solid portfolio of P2P loans can generate a steady stream of passive income. Higher Yields – Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields. A carefully curated portfolio of loans can potentially earn 10% annually or better.
What are the pitfalls of peer-to-peer lending? ›
Disadvantages For Borrowers
Limited Protection: Unlike traditional lenders, debt collection agencies may get involved during repayment issues, possibly leading to a legal action. High-interest rate: For borrowers with poor credit scores, P2P lenders might charge higher interest rates than traditional lenders.
Does P2P lending affect credit score? ›
It's important to note that while some peer to peer lending platforms might offer loans with no credit check, that doesn't mean that they won't affect your credit score. Making your payments in full and on time can have a positive effect on your credit score, just like any other loan.
