Tenants who traditionally flock to payday lenders and finance companies to stem a financial emergency usually do so because they are concerned about denials from traditional financial institutions. The rapid growth of peer lending companies shows that many people are fed up with big banks, yet they still want a cheaper option than the storefront loan companies charge.
What is peer lending?
Peer lending is an alternative to the traditional loan model. Peer lending firms receive much of their capital not from Wall Street like the big banks do, but from ordinary investors that live in our own communities. Many investors put in as little as $25 into a company, which will then make that money available to those who need to borrow money.
These companies are essentially brokers. They simply bring borrowers that are looking for funds to cover household needs together with small investors that are willing to take a chance on those who need support. It basically bypasses the banking system altogether.
Who are peer lenders?
Peer loans are offered through leading companies that facilitate these transactions. They help to increase the amount of money available for tenants to borrow towards their rent and utilities.
- Lending Club is the largest peer-to-peer lender in the U.S. With an average interest rate of 14-15% APR, tenants can receive emergency cash at a rate they can afford to repay. Lending Club is so big that it filed to become a publicly traded company, meaning it shall answer to the same Wall Street investors that the big banks do.
- Prosper has also been gaining ground as a financing alternative. Prosper was actually the first major entrant into this field and has remained one of the top two players. Average rates tend to be in the 14-15% range, which is comparable to competitors.
How much are rates?
Rates do vary based on creditworthiness. Recent credit problems will cause an applicant to be limited to the high risk pool. Others may qualify for lower rates.
Even with higher rates, it is still cheaper than finance companies. It is hugely cheaper than any payday loan. Many borrowers end up getting approved for loans that are comparable to a regular credit card. The advantage though is a single bill with a fixed rate, making the payments more manageable.
While average rates are in the 14-15% range on an annual basis, each borrower is assigned a rate based on their own qualifications. First of all, each borrower is charged an origination fee. Most borrowers will be charged 3-5% upfront, although well qualified borrowers may pay as little as 1-2% origination fee.
The best rates of around 6% go to those with the lowest default risk. There are several risk categories. Those that are approved in the high risk group can expect to pay rates of 25-35%.
There are late fees of $15, though this is less than many other financing options. Compared to credit card late fees of $39-45, this is a relative bargain. While every effort should be made to stick to an on-time repayment schedule, it helps to know that penalties will be lower if an unexpected financial emergency comes up.
The big difference is that unlike credit cards, interest rates will not increase even if an account falls delinquent. The rate will stay the same and the late fees are less, thereby providing an easier path towards catching up on arrears.
Any tenant who is considering the alternative option of peer lending should consider whether they can afford to repay the loan. Someone receiving only social security income may lack the extra income necessary to repay loans on top of their living costs.
This product group is relatively new but it is quickly gaining popularity. It provides a new choice to those that may be denied traditional loans and may have few other options.