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7 Reasons Why a P2P Loan is Good News for “Bad” Credit

Peer to peer lending bad credit

While many of us in the peer to peer lending world have the luxury of having extra cash to invest, the reality is that millions of people in our country struggle under the weight of bills and unpaid debt. Whether through a bad shopping habit or a sudden medical emergency, many people need access to cash but do not have good enough credit history to be approved for a personal loan from a bank.

Many banks and credit unions require a credit score of 700+ for a personal loan. But if someone needs a loan whose credit score is in the 600s, what are their options?  For people in this situation, a peer to peer loan (p2p loan) is truly wonderful news. This avenue of lending online, new to the nation, offers many people a way out.

Seven Reasons to Apply for a P2P Loan (Even With Imperfect Credit)

Seven reasons why peer to peer loans are helpful to people with less than perfect credit scores.

#1. A Smaller Footprint Means More Approvals

People across the United States often struggle to be approved for a personal loan if they apply through the branch of their local bank, even with solid credit history. This is because access to loans has become very tight (Bloomberg) in the past few years. Thankfully, peer to peer lending companies run leaner and more efficiently than banks do. They run almost completely through the internet and have less overhead. As a result, they are able to offer loans to people with lower credit than banks will allow. Prosper, for instance, approves loans for people who have FICO credit scores as low as 640.

#2. Accurate Assessments Mean More Approvals

Many people deserve a line of credit, but are denied for a loan because their bank does not have access to all the applicant’s information. They are gently informed they have “bad” credit, but this is often said by banks who are not seeing the whole picture. Peer to peer lending companies, in contrast, have a remarkable ability to more accurately judge whether someone is deserving of a loan. This is because they can electronically pull data from a wide variety of third-party sources to fully build a borrower’s profile. They do this while also looking at success rates of thousands of their past loans, and this gives them the ability to approve loans for many people who elsewhere be denied.

#3. Awesome Lower Interest Rates

pay day loansThe average American who is denied for a loan by their bank has few options left to them. Often their only option is to get a payday loan, but these types of cash-advance loans often have interest rates higher than 60%. This type of lending is so terrible and predatory that it has been outlawed in some states like Georgia. In contrast, peer to peer lending companies like Prosper issue loans to people with rates that are far more reasonable, sometimes as low as 6.8%.

#4. Higher Loan Amounts (Up to $35,000)

I recently got off the phone with my local credit union. When I asked about the maximum loan amount they could offer me, they said it was $15,000. This is a common problem in our country. Often people need to pay off large debts like credit card balances and medical bills but struggle to find a loan large enough to cover the entire amount. Thankfully, peer to peer lending companies offer loans as high as $35,000, a number than should go up in the coming years.

#5. Amazingly Quick Access to Cash

When applying for a line of credit at a local bank, the process can often take weeks at a time. Paperwork has to be faxed and phone calls have to be made. Peer to peer loans, however, are mostly done over the internet. This allows the process to happy in a fraction of the time. Many people who apply for a loan often have the money deposited in their bank account within 10 days.

#6. Zero Prepayment Penalty

As further evidence that peer to peer lenders are cheaper and more efficient, they offer borrowers the chance to pay any loan off early without a fee. This often means p2p lenders lose a bit of interest, but it is a huge benefit for borrowers. Prepayment fees at banks can often be in the hundreds of dollars, yet loans at companies like Prosper can be paid off early without any penalty at all.

#7. Loans Come from Real People Across America

peopleThis reason has lost a bit of its appeal in the last few years, but I think it is still a big one: peer to peer loans are funded by people around the country. Borrowers may feel little connection to a bank that offers them a loan, but a peer to peer loan is often funded by a hundred lenders all working together. For some borrowers, this can give them a sense of dignity and responsibility for the cash they are entrusted.

For People With Imperfect Credit, Hope Remains

Peer to peer lending is a type of investing that is only just beginning to find legitimacy in the eyes of the nation. This is great news for people struggling under the weight of heavy debt, even those with less than excellent credit. Whereas before people were forced to become delinquent borrowers, they can now have a peer to peer loan consolidate their outrageous debt into one lump sum with a lower interest rate than before.

Unfortunately, most people in the United States are still unaware of peer to peer loans. Payday advance lenders are still making a killing by offering outrageous 60% rate loans to people who have no idea something better exists – something that sites like LendingMemo are trying to change. My hope is that the continued growth of the p2p lending industry begins to alter this harsh reality, bringing people who have imperfect credit the ability to finally get the loan they deserve.

Check your rate at Prosper (won’t hurt your credit score).

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[image credit: Cyril Fluck "Rusty Leaves"
Rolands Lakis "Mother & Daughter"
Eddie~S "Ohio Lottery and PayDay Loans" CC-BY 2.0]

{ 11 comments… add one }

  • Martin July 20, 2013, 9:25 AM

    I agree with your assessment. Thanks to Prosper I could refinance my debt at a lot favorable interest rate and lower monthly payments. It is an excellent opportunity.

    • Simon Cunningham July 20, 2013, 12:13 PM

      Definitely. I imagine more people will learn about p2p loans as more time goes by, but for now its amazing to me that cash-advance loans are still filling this niche.

  • Phil Smeby August 2, 2013, 8:21 PM

    I hope that more states will allow this type of investing. I can’t believe North Carolina is stopping me from participating fully in these programs!

  • Cheryl August 18, 2013, 9:57 AM

    I applied for a loan from Prosper and was denied because my credit score is 636, so they obviously do not help those with low credit scores. If my score was better, I would not be asking them for a loan to begin with.

    • Simon Cunningham August 18, 2013, 12:21 PM

      Thanks for your comment Cheryl. While some people with a FICO below 640 might be approved, anybody with a Scorex below 640 are declined. I think I should have made that statement more clear in my post. Furthermore, Prosper has said they’re switching to FICO this week, so I will reedit the article.

      Thank you for sharing your experience for all of us to hear. I am sorry you were declined.
      Best,
      Simon

  • Johnny October 18, 2013, 2:04 PM

    Hi Simon,
    What happens to defaulters in p2p lending? Is there anything legally binding between lenders and borrowers with respect to default?

    • Simon Cunningham November 3, 2013, 9:31 PM

      Hi Johnny. If a borrower stops paying back their loan, they are handed over to a collections agency. They get many annoying calls and eventually a nasty mark on their credit score. However, these loans are unsecured, so borrowers do not lose their house or car, no matter what.

  • Daniella February 7, 2014, 12:32 PM

    Hi Simon,

    I have been looking for some p2p loans but my credit is in the 500s. Is there any hope?

    • Simon Cunningham February 7, 2014, 12:48 PM

      Not for a peer to peer loan, no. I suggest you repair your credit first.

    • LJ March 27, 2014, 2:25 PM

      Daniella,

      I understand your frustration. How can people with low credit scores (in the 500s) repair their credit if they don’t have the funds to do so.

      • Simon Cunningham March 27, 2014, 5:35 PM

        LJ,
        Everybody’s situation is different, but many get started by taking any extra income they can spare and paying off unpaid debt, starting with the smaller problems first. The road to credit recovery is often a long one. For many people it takes 10+ years, but in the end it is worth it since good credit is what allows us to start businesses and get a home mortgage.
        Hope,
        Simon

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