UPDATED: Mar 15, 2012

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Written By: Sara RouthierReviewed By: Joel OhmanUPDATED: Mar 15, 2012Fact Checked

Long before established banks and lending institutions were created, there were people who lent currency to their friends, family, and peers. Whether that currency of old was a form of legal tender or simply a material possession, borrowing from individuals with wealth predates the formal lending institution we all know (but don’t necessarily love) today.

That system of borrowing from friends, family, and peers is still alive today, and some believe it’s now more popular than ever due to the internet. Particularly for those who don’t have wealthy family and friends in positions to lend money, those who need a personal loan from a non-bank source can now venture to various websites to find a person-to-person (P2P) loan.

The Appeal of P2P Loans

Individuals who encounter unexpected expenses, desire a new low to moderately priced item, or maybe would like some extra spending cash for special occasions often find use in personal loans. The one drawback, however, is that personal loans often come at high interest rates, and, depending on a borrower’s credit score, may require upfront collateral.

P2P loans allow borrowers to obtain personal financing at lower interest rates since the corporate lending institution is removed from the equation. Since this type of credit is offered by individuals with money to borrowers who need money, the overhead is low, and rates can be set at whatever level the lender deems appropriate.

Qualifying for a P2P Loan

Banks and traditional lenders have extensive policies and rigid procedures in place for determining who will qualify for a personal loan. Judging a person on their credit score, income, and outstanding debts, banks may or may not decide to lend to a borrower, and if they do the interest rates offered can fluctuate immensely.

With the online P2P loan system, those offering their money to borrowers often collaborate with one another when determining the eligibility of an applicant. More often than not, that eligibility is determined not by the borrower’s financial history, but rather by the rate and size of return the lenders can hope to receive from the transaction.

In order to ease the risk of lending to strangers and to grant affordable rates under desired conditions, P2P personal loan lenders usually pool their money together to fund individual loans.

According to a MarketWatch article by Amy Hoak, there are a few guidelines borrowers should adhere to when making their case to a P2P lender:

  • Be realistic. Lenders registered on these online websites are not offering their money for charity. They’re seeking to turn a profit on the money they lend to strangers, and definitely know what current fair interest rates are. When applying for a P2P loan, seek a realistic rate and term.
  • Get personal. P2P sites are communities, so sharing personal information in an attempt to let lenders know who you are is encouraged. Plus personal lenders are more apt to give money to individuals they know a little about than they would a faceless stranger.
  • Be patient. As Jean Garascia, an analyst for the California-based company Javelin Strategy & Research, explains, “The demand for loans is much higher than the actual capital available.” Sometimes applicants are approved immediately, while other times they wait for days, or even weeks before receiving word on whether or not they’ll receive their loan.

P2P Loans are Still Real Forms of Financing

It’s important for borrowers to realize that P2P loans are a form of financing like any other type of credit offered from traditional sources. Borrowers are expected to pay this money back or they may find themselves facing a plethora of obstacles.

Those who default on their P2P money will suffer a credit score blow, and their loan will be turned over to a collections agency. If a borrower refused to cooperate with a hired collections agency, they could open themselves up to potential wage garnishment.

The P2P system is not illegal or subpar, but rather it’s a means for borrowers to obtain personal loans from their peers instead of from banks.

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Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Written by Sara Routhier
Director of Outreach Sara Routhier

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman