If you have paid back several payday loans on time and in full, your credit rating may have improved enough for you to borrow from a peer to peer lender. However, peer-to-peer lending works in a different way from payday loan lending. Here is an overview of the main differences.
How Peer-to-Peer Lenders Differ from Payday Loan Lenders
Peer-to-peer lending websites, such as Prosper and Lending Club, connect borrowers with lenders. Unsecured personal loans are offered, so no collateral is needed.
Peer-to-peer lenders usually offer very favorable interest rates. For example, Lending Club’s rates are currently between 6.03 percent and 26.06 percent, depending on your credit score and other factors.
You can borrow more money from peer-to-peer lenders than a payday loan lender and pay it back over a longer period of time. For example, Prosper’s loans range from $2,000 to $35,000 and last for either three or five years.
Each peer-to-peer lending website has a different application process. Lending Club has a short, initial online application form that enables you to find out if you would qualify for a loan within a few minutes. If you qualify, the application process continues.
On Prosper, you write an online loan request, which includes the purpose of the loan and the reasons why you are a good candidate for a loan. Your loan request is then posted on the website and investors decide if they want to lend you all or part of the money.
Investors may be more inclined to lend you money if they can see that you have submitted documentation proving your identity, employment and other information to the website promptly. If one or more investors are willing to lend you money, you will need to complete the approval process before you receive the money in your bank account.
Ensuring Your Credit Information is Up-to-date
If your credit rating has improved in the past year or so, ask the major credit bureaus for copies of your credit reports before applying for a peer-to-peer loan. Read these reports carefully and, if any information is out-of-date or inaccurate, ensure that it is corrected before you apply for a loan.
This will maximize your chances of receiving a loan at a good interest rate because most peer-to-peer lending websites give you their own rating based on information from the credit bureaus and the documentation you provide.
If you need a fairly large loan, a peer-to-peer lender can provide you with the money at a very favorable interest rate, even if you do not yet have an excellent credit rating.