How Do Peer to Peer Lending Clubs Work?

If you’ve searched online for personal loan options and lending programs, you may have come across peer to peer lending clubs and peer to peer lending networks. These lending clubs are designed for people who want to give out personal loans to others for high interest rates, or for those who want to borrow money from someone other than a bank, financial institution or close friend. Peer to peer lending clubs do have a process for qualifying borrowers, and give investors a chance to build a portfolio.

Here’s a quick rundown of how peer to peer lending clubs actually work:

The Peer to Peer Lending Club Process

Unlike banks and other financial institutions that charge high fees and charges for borrowing money, peer to peer lending clubs use a more streamlined approach to the entire lending and borrowing process, which means the borrowers and lenders actually end up saving money on the transaction. Investors can open an account and provide information on how much money they have available to lend. Borrowers join peer to peer lending clubs by submitting a formal application and indicating how much they want to borrow, and what type of monthly payment plan they are comfortable with.

Most peer to peer lending clubs allow borrowers and investors to submit their applications right over the Internet and they receive an answer within the same day or 48 hours. Borrowers commit to a fixed monthly payment plan and all transactions are conducted over a secure server so the personal identities of borrowers and lenders are never shared.

Rates vary based on the peer to peer lending club and company, and are subject to credit approval. The borrower can link a bank account to their peer to peer lending club account, and will make automatic payments on a schedule. Most lending clubs also allow the borrower to prepay at any time without a penalty.

Benefits of Peer to Peer Lending Clubs

Some of the larger peer to peer lending clubs offer several different types of personal loans. These loans may be used to pay off credit cards, consolidate debts, or even to make home improvements. Loan options may include:

• Car and vehicle (auto) loans
• Business loans
• Loans for special events
• Green loans
• Loans for a wedding or surgery
• Loans for elective surgery or medical costs the insurance company won’t cover

Peer to peer lending clubs can make it very simple and efficient to get some extra money you need, without having to apply for a personal loan or another credit card through a financial institution. If you have extra money that you want to invest, you could earn a higher return on your investment by making funds available through some of these lending clubs. Even though there is still a risk that the borrower may default on the loan, reputable peer to peer lending clubs only approve borrowers who have a good chance of paying the loan back and must comply with the rules stated in the repayment agreement.