SoFi

You want to flip a house, but you don’t have enough money for a down payment — and your credit isn’t where it needs to be for a personal loan. Or maybe you’re a small business owner who wants to own a piece of commercial real estate. People who are investing in real estate beyond their primary residence may consider a hard money loan as an option, especially if a traditional mortgage isn’t.

A hard money loan uses the property as collateral. In terms of personal loans, explained, hard money loans tend to lie squarely in the real estate investment and improvement category. They are not offered by a bank, but by either a private company or an individual. A hard money loan may make sense on paper, but because it typically has a shorter term than other types of loans and interest rates can be high, paying back the loan can be challenging. Defaulting on a hard money loan could mean losing the property.

What Is a Hard Money Personal Loan?

A hard money personal loan is a type of personal loan that uses collateral. While a mortgage is also a type of loan that uses property as collateral, a hard money loan is very different.

First of all, a hard money loan doesn’t come from a bank. It comes from a private lender, which may be a company or an individual. The loan will likely have higher interest rates and a shorter payback period than a traditional mortgage.

It can also be a much shorter process to be approved for a hard money loan. While a mortgage may take weeks for approval, it’s not atypical to have cash in hand within a few days of a hard money loan application.

A hard money loan also may be more lenient in terms of credit scores or assets than a traditional loan. This can be beneficial for people who are wanting to flip a house or buy an additional piece of property, who may not have enough assets on paper to be approved for a traditional mortgage, or who need a larger down payment than they have.

How Do Hard Money Personal Loans Work?

Hard money personal loans are often advertised to — and used as a tool for — house flippers, but other people may pursue a hard money personal loan as well.

Let’s say someone wants to buy a house to flip, or a piece of land to use as a rental property. They may still be building their credit, or they may not have enough money for a down payment. They may have been turned down for a mortgage, or they may not want to apply for a mortgage, knowing that it’s a time-intensive process and their finances might not be as strong on paper as they know the bank would like.

In this case, the person might turn to a hard money personal loan. Individuals or private companies may specialize in offering hard money loans, and terms and conditions may vary — one to three years is common, compared to 20 or more years for a mortgage. But the one constant: If you can’t pay back the loan, then you lose the collateral, which would be the property.

Other things to be aware of regarding a hard money personal loan: Interest rates may be high and the loan term is much shorter than a mortgage. This comes with a fair amount of risk.

Pros and Cons of Hard Money Personal Loans

As with any personal loan, it’s important to consider the pros and cons of the loan. It can also be a good idea to consider what-ifs, and how you might pay back the money if the original plan doesn’t work. Here, some pros and cons to think about before applying for a hard money personal loan.

Pros of a hard money personal loan	Cons of a hard money personal loan
Receive money fast	Short loan payback period
Flexibility in terms of credit score and overall financial picture	High interest rates
Can use hard money for whatever you need the money for	Possibility of losing property if you cannot fulfill the terms of the loan

Personal Loans Versus Hard Money Loans

The primary difference between an unsecured personal loan and a hard money loan is that a hard money loan is secured. Both are personal loans, but using collateral for a personal loan means the loan is secured.

Collateral can be anything of value. But in the case of a hard money loan, it’s in the form of property. A personal loan typically does not require collateral. If you were unable to pay back a personal loan, the lender could not take away your house, for example. Both types of personal loans have specific terms and conditions, and both can provide cash relatively quickly. However, many personal loans are backed by a bank.

Hard money loans	Personal loans
Backed by a private individual or company	Backed by a bank
Credit checks and financial picture play a limited role in approval	Credit check plays a large role in approval
Provides cash	Provides cash

Is a Hard Money Personal Loan Right For You?

Hard money personal loans may be an option for certain financial needs. But, as with any personal loan, it’s important to weigh the pros and cons, and consider what-ifs. Questions to ask may include:

•   What other avenues can I follow to raise the money I need?

•   What happens if I don’t pursue this loan?

•   If I do get this loan and plan to do a specific thing with it, what happens if that specific thing doesn’t happen the way I anticipated?

•   Can I afford this loan, including interest?

•   Could I afford this loan if my financial circumstances changed?

These questions can help you assess worst-case scenarios. You also may want to ask your potential lender any questions you have as well.

Hard Money Personal Loan Alternatives

There are potential alternatives to hard money personal loans. Some may require collateral, and others, like a personal loan, may not. Each comes with pros and cons. Your financial situation may also determine which loans you might be eligible for. If you’re building your credit, you may not have access to certain loans.

Credit Cards

If you’re purchasing land or property, you likely need cash. But for other purchases, using a credit card could be an option. If you don’t need a lump sum of money, using the line of credit that a credit card offers may work well for making periodic purchases.

However, credit cards may have high, variable interest rates. Plus, the more of your available credit you use, the higher your credit utilization ratio, which could impact your credit score.

Recommended: What Is A Personal Line of Credit & How Do You Get One?

Personal Loans

Can you buy land with a personal loan? You could. Generally, once you’re approved for a personal loan, you receive money in your account which you can use for whatever you like. Some people use personal loans to pay for renovations or other home improvement projects.

But it could be challenging to get mortgage approval if you were planning on using a personal loan for a down payment, for example. A personal loan may affect mortgage eligibility.

Recommended: Do Personal Loans Affect Getting a Mortgage?

HELOC

A home equity line of credit (HELOC) is a type of revolving debt. For example, if you apply for a HELOC and are approved for $10,000, you can draw up to $10,000. Once that money is paid back, you can draw from it again for the set period of time defined in the terms of the loan.

A HELOC is a popular option for people who are doing home improvement projects. They may not need a lump sum of cash but may have ongoing expenses. Generally, interest rates on a HELOC are variable, not fixed.

Since a HELOC is a loan secured by the borrower’s home, there is a risk of losing the home if the loan is not repaid.

Recommended: How Do Home Equity Lines of Credit Work?

The Takeaway

For some people, hard money personal loans can allow them to realize their real estate goals. But hard money loans typically have high-interest rates and short payback periods, which can make them risky. It can be a good idea to carefully weigh the pros and cons of a hard money loan.

A SoFi Personal Loan may be an alternative to consider. Since unsecured personal loans from SoFi do not require collateral, they could be a good option for those just entering the real estate market. With no fees required, fixed interest rates, and a variety of terms available, there may be a SoFi personal loan to fit your financial needs.

Check your rate on a personal loan from SoFi

---

Photo credit: iStock/JLco – Julia Amaral

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL0422006

Read more

If you’re in a bind and there aren’t many other options available to you, it is possible to get a personal loan for paying rent. This is, of course, if you can get approved for a rental assistance loan with your credit and income.

Before you’d get a loan for rent, you may want to evaluate the costs involved and the pros and cons. Read on to learn more about getting a loan for rent payment.

What Types of Loans Can You Use for Rent Payments?

There are a several different personal loan types that you can obtain for paying rent. These include secured and unsecured personal loans for rent assistance, as well as payday loans and cash advances.

Secured Personal Loans

Secured loans use property as collateral. If the payments on the loan are not made, the lender can take the collateral. Some types of collateral that may be used include cash savings, stocks, a car, a boat, a home, jewelry, fine art, and future paychecks.

Securing a loan with collateral may result in a lower rate, but all conditions are dependent on what the lender is willing to take and what terms they’re willing to offer on a personal loan.

Unsecured Personal Loans

Unsecured personal loans do not secure the loan using collateral. Since the lender has fewer options for recovering the funds lent, these types of loans often come with higher rates and shorter terms.

Payday Loans or Cash Advances

A payday loan, or cash advance loan, is a loan made for a short amount of time for a fee. These fees are usually expensive. Additionally, interest rates are usually steep. Every other option should be explored before you consider emergency loans for rent.

Recommended: How Do Payday Loans Work?

Reasons Why You May Need to Use Loans for Rent

Using a personal loan for rent shouldn’t be done as a matter of course, but you may come across certain scenarios where it may make sense, such as when:

•  You have a short-term financial setback.

•  You’ll soon have the funds to pay the loan back.

•  You have a good to excellent credit score.

•  You can afford to make the monthly payments.

•  Your only other option is a payday loan.

Keep in mind that while there’s a lot you can use a personal loan for, taking one out still involves assuming debt. If you’re not confident you can repay a loan for rent, then it’s worth considering if you have any other options available to cover your rental costs for the month.

What Happens If You Do Not Pay Your Rent?

If you do not pay your rent, your landlord can start eviction proceedings against you. Laws vary from state to state and city to city, but it’s important to pay your rent on time.

If you know you’re going to have trouble paying rent, dig out your lease agreement and find out if you have a grace period, what the late fees are going to be, and who to contact if you need to pay late. It’s possible your landlord may offer grace and delay eviction proceedings if they’re aware of your situation.

Is It a Good Idea to Use Personal Loans for Rent Payments?

Generally, experts advise against using a personal loan for paying rent. Ideally, you should have an emergency fund that can cover these essential costs if something unexpected arises.

However, if you’ve decided this is your best course of action, there are some positive aspects to obtaining loans for rent over other potential options. Of course, there are downsides to take into account as well.

Recommended: How to Start an Emergency Fund

Pros of Using Loans for Rent Payments

Personal loans are known for their flexibility and versatility. Here are some of the upsides of turning to a personal loan for paying rent.

Potentially Competitive Loan Terms

A personal loan can come with competitive terms. If you’ve kept your credit in good shape, you may be able to qualify for a low-interest rate with low fees and a reasonable repayment term. Your credit score doesn’t have to be perfect to be approved for a personal loan, but a score higher than 670 may increase your personal loan approval chances.

Recommended: How to Get Approved for a Personal Loan 

Accessibility

Personal loans are known for being very flexible. Borrowers can use them for a wide variety of purposes. For instance, you can use a personal loan for debt consolidation or to cover home renovations, an upcoming vacation, or even rent, among a number of other things. Plus, personal loans offer quick access to funds — sometimes even the same day you apply.

Possible Improvements to Credit Score

If you pay back your loan on time, having a personal loan could improve your credit score. It could also boost your credit mix, another factor that impacts your credit score.

Affordability

The interest rate on a personal loan is usually more affordable than paying interest on a credit card. Your landlord may not even be able to take a credit card payment.

Cons of Using Loans for Rent Payments

Using a personal loan to pay rent generally isn’t recommended unless it’s a last resort. There are a number of negatives you’ll encounter.

Additional Fees

Personal loans aren’t free. You may have to pay an upfront fee to take out the loan, not to mention late fees if you miss a payment or even prepayment penalties if you pay in advance.

Possible Harm to Credit Score

Your credit score will drop if you miss a payment on your loan. A lower credit score will decrease your ability to qualify for future loans on things like auto loans and mortgages.

Interest Rates

If you’re having trouble making your rent payment, other areas of your financial life may have taken a hit. This could mean the interest rate you’re given for a personal loan will be less than ideal. Even if you’ve been able to maintain great credit, you’ll still need to pay interest on a loan for rent.

Increased Debt

Personal loans add debt to your bottom line. You’ll pay more over time by financing your rent payment into a loan. If you’re experiencing financial woes, adding a loan payment on top of what you’re going through may not be a good option.

More Personal Loan Tips

It’s possible to obtain a personal loan for a wide range of possibilities, including paying rent. However, it’s important to weigh the pros and cons of getting a loan for rent before you do so. You’ll owe fees and interest, and you could harm your credit score if you’re not timely about repayment. But if it’s your last resort, a loan for rent is an available option.

If you do decide to get a personal loan — whether for covering rent or another purpose, such as debt consolidation — it’s important to shop around to find competitive offers. SoFi personal loans, for instance, have no fees required and low interest rates.

To learn more and find your rate, take a look at the options for a personal loan today.

FAQs

Are you able to use loans for rent payments?

Yes, you can use loans for rent payments. You may want to examine all your options before you do, though. Personal loans carry fees and interest, and if you miss payments, you can drag down your credit score.

Is it hard to get a loan for rent payments?

It can be hard to get a loan if you have no credit history or a low income. A lender will analyze your credit score, history, and income to determine what amount you can afford to borrow and on what terms.

What type of loan is good for rent payments?

Personal loans are a very flexible means to pay for a number of things, including rent. Payday loans or cash advance loans are very expensive ways to make rent payments, and generally should be avoided.

---

Photo credit: iStock/nortonrsx

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SOPL0322025

Read more

There are many different types of loans. And when you need money quickly, it can be challenging to assess the pros and cons of different options. It can also be challenging to assess which loans are right for you if you’re still building credit.

Many loans require a credit check, and your credit score may affect the interest rate and terms you are able to qualify for when borrowing a loan. But what if you have no credit or bad credit? There may be other loans available outside of personal loans from banks. Income-based loans, which evaluate your income as a primary deciding factor, may be an option to consider. These loans could give you the cash you need but may have considerations. Here is what to know about loans based on income.

Recommended: 11 Types of Personal Loans & Their Differences

How Does a Loan Based on Income Work?

Personal loans can be used to pay for nearly any expense. In addition to the flexibility for use of funds, other advantages of personal loans include convenience, competitive rates, and quick turnaround times. Though lenders often evaluate an applicant’s credit history in order to make lending decisions.

Loans based on income are also called income-based loans. Instead of focusing on an applicant’s credit score and history, like many personal loan applications, these loans may factor your income into account. While “income-based loans” and “loans based on income” are terms you may see when researching personal loans, these are primarily marketing terms. The companies who use these may be using income as a method of evaluating loan applications, making them an option for borrowers looking for no credit check loans.

A loan based on income depends upon the terms of the loan. Often, the lender may ask for proof of income, which may be a W-2 or paystub. You’ll need to share personal information on the loan application, such as your address and social security number. But unlike a traditional personal loan, the evaluation may not include a credit check.

Because the lender isn’t considering credit, the terms of the loan may be different from a traditional personal loan from the bank. For example, the loan may have a very high interest rate or require collateral. Collateral is when you, as a borrower, put up something tangible to back the loan in case you were unable to pay back the loan. This might be something like your car or even your house.

Whether a loan requires collateral determines whether it is a secured or unsecured loan. Both options may be part of an income-based personal loan.

Recommended: Using Collateral on a Personal Loan

Secured Loan

A secured loan is a loan that requires the borrower to put up collateral. These loans can take several forms:

Pawn loan. A pawn shop loan is where you put an item of value up as collateral, such as jewelry or electronics, in exchange for the loan. In addition to collateral, you’ll also have to pay the loan back with interest. If you are unable to do so, the pawn shop will then own the collateral and may sell it. Pawn loans can also be an option for those looking for no bank account loans.

Title loan. If you own your vehicle, you may be able to take out a loan for the valued amount of your car. In a title loan, you physically keep possession of your car, but the lender can hold the title of your vehicle. Interest rates for this type of loan can be very high — up to an APR equivalent of 300% — and can be risky. After all, if your income depends on your ability to drive to work, losing ownership of your car may mean that your ability to work is in jeopardy, too.

Home equity loan. If you own your home, you can borrow against the value of your home’s equity through different types of loans, including cash-out refinance, a home equity line of credit (HELOC) or a fixed-rate home equity loan. These types of loans can require a relatively lengthy approval process, and may not be appropriate if you need cash quickly, or if you need a relatively small loan.

💡 Learn more about home equity lines of credit

Unsecured loan?

An unsecured loan does not require collateral. For this reason, this type of loan can feel “riskier” to the lender. If you do not pay back the loan, the process to get back their money will take a long time, involve the legal system, and may be fruitless if you declare bankruptcy.

That’s why lenders may require a more extensive application, including performing a credit check on the potential borrower. If you, as a borrower, know that your credit history is limited or you are still building your credit, you may have fewer personal loan options, especially when it comes to unsecured loans.

Still, there may be some available. Knowing the pros and cons, reading the fine print, and having a clear plan for how to pay back the loan can be important in assessing which one is the right one for you.

Payday Loans

One common type of loan that might be accessible for people with no or bad credit is a payday loan. This is usually a short-term, high-cost loan that is due on your next payday. Typically, payday loans are relatively small (generally under $500) and some states may have a limit as to how much people can borrow.

Payday loans are, like their name, due on your next payday or when you next get income. A payday loan typically has a relatively high-interest rate or fees as well. To ensure your loan is paid back, the lender may ask for a postdated check or money order. One of the problems with payday loans is that they can lead to a cycle of borrowing. While you have cash in hand, how will you make sure you can pay back the payday loan and cover expenses?

Recommended: Payday Loans, Explained – How Do They Work?

Alternatives to Loans Based on Income

If you need money quickly, you may have more options available. These could include:

Using a credit card or credit line. If you have access to credit, utilizing a credit card or credit line could help you through a rough financial patch. But because interest rates can be high, having a plan to pay back what you borrowed or taking advantage of a card with a low APR could be an option to consider.

Borrowing from friends or family. Sometimes, a loan from a friend or family member can be more flexible than borrowing from a lender. It can be a good idea to consider drafting an agreement, even if it’s relatively informal, regarding expectations, any interest agreements, and other conditions.

Selling things. Selling things you may not need may help you raise cash quickly. Using local online marketplaces can be a quick way to unload things you’re not using and raise money.

Starting a side hustle. While it can take time to onboard onto a new job, applying for part-time jobs could be a potential long-term strategy to access more money. In the short-term, informal jobs such as babysitting, tutoring, or other work could help you raise the cash you need.

Recommended: Family Loans: Borrowing From & Lending to Family

The Takeaway

Finding yourself in a financial lurch can be scary. But taking the time to weigh pros and cons of options may be helpful in choosing a sustainable path forward. Understanding the benefits and risks of loans based on income can help you assess whether this type of loan makes sense for your current financial circumstances.

SoFi offers personal loans with competitive interest rates for qualifying borrowers. Some loans may be eligible for same-day funding.

---

Photo credit: iStock/Khosrork

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL0422007

Read more

Paying down debt can be an important financial priority, but should you use your savings in order to do so? While it can be tempting to throw your full efforts into paying off debt, maintaining a healthy savings account for emergencies and saving for retirement are also important financial goals.

Continue reading for more information on why it may not always make sense to use savings to pay off debt and ideas and strategies to help you expedite your debt repayment without sacrificing your savings account.

The Case Against Using Savings to Pay Off Debt

Emptying your savings account to pay off debt could cause you to rely on credit cards to cover expenses, which has the potential to create a cycle of debt. Think of it this way — it can be much harder to get yourself out of debt if you keep using credit cards to cover unexpected costs.

Consider creating a plan to pay off high interest debt while maintaining or building your emergency fund. This way, you’ll be better prepared to deal with unexpected expenses — like a trip to the emergency room.

How to Start Paying Off Debt Without Dipping Into Your Savings

First off, if you do not have an established emergency fund, consider crafting a budget that will allow you to build one while you simultaneously focus on paying down debt. The exact size of your emergency fund will depend on your personal expenses and income. A general rule of thumb suggests saving between three and six months worth of living expenses in an emergency savings account. Having this available to you can help you avoid taking on additional debt if you encounter unforeseen expenses.

Make a Budget

Now’s the time to update or make a budget from scratch. Understanding your spending vs. income is essential to help you pay off your debt and avoid going into further debt. Review all of your expenses and sources of income and figure out how to allocate your income across debt payments, while still allowing you to save for your future.

Establish a Debt Payoff Strategy

Review each of your debts. Make note of the amount owed and interest rates. This is important to create a full picture for how much you owe. Then, pick a debt pay-off strategy that will work for you. Popular debt payoff strategies include:

•   The Snowball Method. For this method, list debts from smallest balance to largest — ignoring the interest rates. While making minimum payments on all debts, all extra payments should go toward the smallest debt. As the debts are paid off, move to the next largest debt until all debts are paid off.

•   The Avalanche Method. Similarly to the snowball method, this debt payoff strategy focuses on paying off debts with high-interest rates first. By focusing extra payments on the highest interest rate debts, this strategy helps minimize the amount of interest you pay, which might save you money in the long term.

•   The Fireball Method. This strategy combines both the Avalanche and Snowball methods. Individuals group their debts into good or bad categories. Good debt is considered debts that help build net worth and generally have an interest rate of 7% or less. While making the minimum payments on all accounts, the Fireball focuses on paying the highest interest loan with the smallest balance first.

Different people may prefer one strategy over another, the key is to select something that works best with your debts, income, and financial personality.

Recommended: Explaining the Snowball Method of Paying Down Debt

Consider Debt Consolidation

If you have debt with a variety of lenders, one option is to consider consolidating your debt with a personal loan. Instead of making multiple payments across lenders you’ll instead have just one payment for your personal loan. One common use for personal loans include consolidating credit card debt. Because credit card debt generally has a high interest rate, consolidating it into a lower-interest personal loan can potentially lower the amount of money owed in interest during debt-payoff.

There are a couple different types of personal loans. For example personal loans can be secured or unsecured and may have either a fixed or variable interest rate. To find the best personal loan for you, review the options available at a few different lenders.

Review the application requirements with your chosen lender. Having the required documentation ready can streamline the application process and hopefully, get your personal loan approved. During the application process lenders evaluate factors including your income and credit history, among other considerations, to make their lending decisions.

How to Reduce Spending to Pay Off Debt Quicker

Reducing your spending can make more room in your budget for debt payments. Making overpayments can help speed up debt payoff, but it can be challenging to amend your spending habits. To lower your spending, take an honest look at your current expenses and spending habits. Review your budget and credit card statements to see where your money is going.

Think seriously about your needs vs. your wants. Start making spending cuts in the wants category, for example reducing the amount of takeout you order, limiting streaming services, or other indulgences.

For less luxurious expenses like internet or your cell phone bill, call your service provider and see if they are willing to negotiate with you or evaluate if you are able to switch to a less expensive plan.

If you’ve already got a tight budget, the alternative is to increase your revenue stream. Consider a side hustle to boost your income and funnel that additional money toward debt payments. You may even be able to find a side gig that allows you to make money from home.

Paying Off Debt the Smart Way

It can be tempting to throw your savings at debt to avoid racking up expensive interest charges. But draining your savings account — or failing to save at all — in favor of debt payoff might not be a smart strategy. With little or no savings, you’ll be less prepared for any emergency expenses in the future, which could lead to even more debt. Consider building your savings while paying off debt by creating a budget, cutting your expenses or boosting your income, and finding (and sticking to) a debt repayment strategy.

One option worth considering is using a personal loan to consolidate your debt. Using a personal loan to pay off debt may sound counter-intuitive at first, by securing a personal loan with a more competitive interest rate than your existing debts, you could lower the amount you spend in interest. To see how using a personal loan to consolidate your debt might benefit you, take a look at SoFi’s personal loan calculator.

If you are looking at borrowing a personal loan, consider SoFi.

SoFi offers competitive interest rates and some borrowers may qualify for same-day funding.

---

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL0622006

Read more

Sometimes you need a loan for a venture that a traditional bank might not approve. In these instances, a peer-to-peer (P2P) loan might be what you’re looking for. Peer-to-peer lending, also known as social lending, rose out of the 2008 financial crisis. When banks stopped lending money as freely as they had in the past, potential borrowers had fewer loan options. At the same time, low interest rates meant lower returns from savings accounts or CDs.

Enter P2P lending sites. P2P lenders essentially cut out the middleman (banks and traditional lenders) and created a space for borrowers and investors to do business. Since then, the concept of lending person-to-person has taken off, with the rise of a number of peer-to-peer lending platforms.

Wondering if a P2P loan is right for you? Or if investing in P2P lending is a smart way to diversify your portfolio? Let’s take a look at some of the pros and cons.

What Is Peer-to-Peer (P2P) Lending?

P2P lending links up people who want to borrow money with individual investors who want to lend money. P2P lending sites like Lending Club, Prosper, and Upstart — three of the largest P2P lenders — provide low-cost platforms where borrowers can request loans and investors can bid on them.

Most of the personal loans offered on P2P platforms range from $1,000 to $40,000 and have repayment periods of approximately 36 months. Interest rates can vary widely, from around 6% to 36%, depending on factors including the purpose of a loan and the individual’s credit history and perceived risk.

The lending platforms make money from serving as the intermediary in this process. In exchange for keeping records and transferring funds between parties, they charge a fee — typically a 1% annual fee — to the investors lending the money. Some platforms also charge origination or closing fees to the borrowers, which typically range from 1% to 5% of the loan amount.

In addition to personal loans, many P2P platforms may also offer small business, medical, and education loans as well.

Is Peer-to-Peer Lending Safe?

The bulk of the risk of peer-to-peer lending falls onto investors. It’s possible that borrowers will default on their loans, and that risk increases if the investor opts to lend to those with lower credit ratings. If the loan were to go into default, the investor may not get paid back.

Further, peer-to-peer lending is an investment opportunity, and returns are never guaranteed when investing. There is the risk that investors could lose some or all of the amount they invest. Unlike deposit accounts with a traditional bank or credit union, P2P investments are not FDIC-insured.

How Does Peer-to-Peer (P2P) Lending Work?

The basic P2P lending process works like this: A borrower first goes through a quick soft credit pull with the P2P lending platform of their choice to determine initial eligibility. If eligible to continue, the lender likely will conduct a hard credit pull and then assign a borrower a “loan grade,” which will help lenders or investors assess how much of a risk lending to them might be.

The borrower can then make a listing for their loan, including the interest rate they’re willing to pay. With most P2P lending platforms, the borrower has an opportunity to make a case for themselves; they can provide an introduction and describe why they need the loan. A compelling, creative listing might have more luck grabbing a lender’s attention and trust.

Next, lenders can bid on the listing with the amount they can lend and the interest rate they’d be willing to offer. After the listing has ended, the qualified bids are combined into a single loan and that amount is deposited into the borrower’s bank account.

Peer-to-Peer (P2P) Lending Examples

With the rise of P2P lending, there are now a number of lending platforms to choose from. Here are some examples of popular peer-to-peer lending sites:

•   LendingClub: LendingClub offers loans of up to $40,000 that can be used for a variety of purposes, including paying down high-interest debt or funding a home improvement project. Borrowers can receive funding in as little as 24 hours upon loan approval.

•   Prosper: Prosper can provide loans in amounts anywhere from $2,000 up to $40,000. Loan terms are three or five years, and funding can happen in as little as one business day.

•   Upstart: Upstart can offer borrowers loans of up to $50,000, with loan terms of either three or five years. It’s possible to check your rate in minutes, and most loans are funded within one business day after signing.

Peer-to-Peer (P2P) Lending for Bad Credit

It is possible to get a peer-to-peer loan with a bad credit score (meaning a FICO score below 580). However, those with lower credit scores will almost certainly pay higher interest rates.

Additionally, those with bad credit may have more limited options in lenders, though there are peer-to-peer lending for bad credit options. Many platforms have minimum credit score requirements, which tend to be in the range of fair (580-669) to good (670-739). For instance, Prosper, one of the major P2P lending platforms, requires a minimum score of 680.

If you have bad credit and are seeking a P2P loan, you might first work to improve your credit score before applying. Or, you could consider getting a cosigner, which can increase your odds of getting approved and securing a better rate if you’re finding it hard to get a personal loan.

Peer-to-Peer (P2P) Lenders Fees

Peer-to-peer lending platforms can charge fees to both borrowers and investors. Which fees apply and the amount of these fees can vary from lender to lender.

A common fee that borrowers may encounter is an origination fee, which is typically a percentage of the loan amount. Other fees that borrowers may face include late fees, returned payment fees, and fees for requesting paper copies of records.

Investors, meanwhile, may owe an investor service fee. This is generally a percentage of the amount of loan payments they receive.

Pros of Peer-to-Peer (P2P) Lending

There are upsides to peer-to-peer lending for both borrowers and investors. However, the benefits will differ for both parties involved.

Pros of P2P Loans for Borrowers

•   Easier eligibility: The biggest advantage for a borrower getting a personal loan peer-to-peer is being eligible for a loan they might not have been able to get from a traditional lender.

•   Faster approval and competitive rates: P2P lenders might approve your loan faster and offer a more competitive rate than a traditional lender would.

•   Possible to pay off credit card debt: One way that people are using P2P loans is to crush their credit card debt. People with high credit card balances could be paying up to 20% APR or higher in interest charges. If they can wipe it out with a P2P loan at a lower interest rate, it can save them a lot of money.

•   Option to finance upcoming expenses: Those who are facing a lot of upcoming expenses might find it more cost-effective to take out a P2P loan rather than put those expenses on a high-interest credit card.

Pros of P2P Loans for Investors

•   Promising alternative investment opportunity: Some see P2P lending as a promising alternative investment. When you lend money P2P, you can earn income on the returns as the borrower repays you. Those interest rates can be a few percentage points higher than what you might earn by keeping your money in a savings account or a CD. While there is some risk involved, some investors see it as less volatile than investing in the stock market.

•   Option to spread out risk: P2P lenders also offer many options in terms of the types of risk investors want to take on. Additionally, there are ways you can spread the amount you’re lending over multiple loans with different risk levels.

•   Sense of community: For borrowers and investors, the sense of community on these sites is a welcome alternative to other forms of lending and investing. Borrowers can tell their stories and investors can help give their borrowers a happy ending to those stories.

Cons of Peer-to-Peer (P2P) Lending

Though there are upsides to peer-to-peer lending, there are certainly problems as well. These include:

•   Risk for investors: The biggest disadvantage of P2P lending is risk. Since P2P loans are unsecured, there’s no guarantee an investor will get their money back. The borrowers on a P2P site might be there because traditional banks already declined their application. This means investors might need to do extra legwork on their end to evaluate how much risk they can take on.

•   Potentially higher rates for borrowers: For borrowers, while P2P lenders might approve a loan that a traditional bank wouldn’t, they might offer it with a much higher interest rate. In these cases, it could be wiser to search for alternatives rather than accepting a loan with a costly interest rate.

•   Effort and personal exposure for borrowers: There can be a lot of effort and personal exposure involved for the borrower. Borrowers have to make their case, and their financial story and risk grade will be posted for all to see. While we’re used to sharing a lot of our lives online, sharing financial information might feel like too much for some borrowers.

•   Relatively new industry with evolving regulations: Then there’s the risk of P2P lending itself. The concept is still relatively new, and the decision on how best to regulate and report on the industry is still very much a work in progress. Some lending platforms have already hit growing pains as well. As regulations around the industry change and investors are tempted elsewhere, the concept could lose steam, putting lending platforms in danger of closing.

Peer-to-Peer (P2P) Loans vs Bank Loans

When it comes to P2P loans compared to bank loans, the biggest difference is who is funding the loan. Whereas bank loans are funded by financial institutions, peer-to-peer loans are funded by individuals or groups of individuals.

Further, bank loans tend to have more stringent qualification requirements in comparison to P2P loans. This is why those with lower credit scores or thinner credit histories may turn to peer-to-peer lending after being denied by traditional lenders. In turn, default rates also tend to be higher with peer-to-peer lending.

The Takeaway

Peer-to-peer lending takes out the middleman, allowing borrowers and investors to do business. For borrowers, P2P loans can offer an opportunity to secure financing they may be struggling to access through traditional lenders. And for investors, P2P loans can offer an investing opportunity and a sense of community, as they’ll see where their money is going. However, there are drawbacks to consider before getting a peer-to-peer loan, namely the risk involved for investors.

Whether you’re getting a P2P loan or a loan from a traditional lender, it’s important to shop around to find the most competitive terms available to you. SoFi makes it easy to compare personal loan rates, and you can then apply online in just one minute.

Check out SoFi personal loans today to learn more!

FAQ

Is peer-to-peer lending safe?

There are certainly risks involved in peer-to-peer lending, particularly for investors. For one, borrowers could default on their loan, resulting in investors losing their money. Additionally, there’s no guarantee of returns when investing.

What is peer-to-peer lending?

Peer-to-peer lending is a type of lending wherein individual investors loan money directly to individual borrowers, effectively cutting out banks or other traditional financial institutions as the middlemen. This can allow borrowers who may have been denied by more traditional lenders to access funds, and provide investors with a shot at earning returns.

What is an example of peer-to-peer lending?

Some popular P2P lending sites include Lending Club, Prosper, Upstart, and Funding Circle. Borrowers can use peer-to-peer loans for a variety of purposes, such as home improvement, debt consolidation, small business costs, and major expenses like medical bills or car repairs.

---

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL0222018

Read more