Peer-to-Peer (P2P) Lending

Photo to accompany story about peer to peer loans. Getty Images

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In this pandemic economy, getting a loan is a lot tougher than usual. 

Economic conditions have stabilized since the beginning of the COVID-19 outbreak, but unemployment is still at a record high. As a result, lenders across various industries have tightened their belts, implementing restrictions on loan-lending. 

Peer-to-peer lenders, often seen as the more nimble underdog in relation to big banks, are assessing risk in a similar way. 

We asked peer-to-peer lenders, such as LendingClub, Upstart, and Prosper, how they’ve responded to the COVID-19 pandemic to understand what these changes mean for you as a current or future borrower.

What Is Peer-To-Peer Lending?

Peer-to-peer (P2P) lenders are secondary marketplaces for loans — connecting individual borrowers and lenders over an online platform. Lenders and borrowers never directly interact with each other; the P2P platform acts instead as facilitator or middleman. The most common type of P2P loan is a personal or business loan.

Traditional lenders, particularly big banks, typically set lending standards, qualification, and loan terms applied evenly across the customer base. With P2P lending, individual lenders can offer more competitive interest rates and flexible terms for loans, and the application process often takes only minutes. Depending on the company, P2P lenders may be more lenient or more strict with qualification standards. Many of them will cap loan amounts at around $40,000-$50,000, lower than the traditional lender.

P2P lenders are similar to traditional lenders in some key ways. In general, the better your credit history, the lower the interest rate. P2P lenders also require verification of income and credit history for your loan to be approved. If you default on your loan, both traditional and P2P lenders will send your debt to collections agencies. 

How COVID-19 Has Affected Lending

The pandemic, especially early on, has made lending more stringent. Generally, during recessions, it is common for loan applications to increase as people experiencing financial hardship seek alternative forms of credit.

“The majority of Upstart borrowers are using an Upstart loan for either debt consolidation or the repayment of credit card debt,” says a spokesperson for Upstart, a P2P personal loan lender. 

Despite the increase in applications, loan originations (disbursements) are down year-over-year due to tightened lending standards, says Sarah Cain, head of partnerships and new customer acquisitions at Prosper, a P2P personal loan lender. To limit approvals and originations, Prosper is focusing on people with higher credit scores and more rigorously verifying the income stated on applications.

LendingClub has made similar moves since the beginning of the pandemic. “We decided early on to operate with materially reduced originations to allow platform investors time to address issues affecting their capital, their liquidity, and the expected performance across their portfolios,” said Anuj Nayar, financial health officer at LendingClub. This includes reducing approval rates for high-risk borrowers, enacting more income and employment verification requirements, and raising interest rates on new loans.

What This Means for Borrowers

Prospective Borrowers

People with “good” to “excellent” credit scores (above 670, according to FICO) will be more likely to get approved for loans with low interest rates, regardless of whether they’re from traditional or P2P lenders. Those with average credit scores may still make the threshold, but with higher interest rates. It’s important to shop around for the best rate and loan terms to set yourself up for success. 

To put your best foot forward, you can try to rebuild or repair your credit score by making a debt repayment plan, continuing to make on-time payments, and taking advantage of credit counseling, among other advice. 

Current Borrowers

For current borrowers of P2P loans, both traditional and P2P lenders have set up hardship programs that can give you a break on your payments, whether its reduced payments or interest rates, delayed payments, payment waivers, loan term extensions, or other types of accommodations. Prosper, LendingClub, and Upstart have all said they’ve implemented this type of relief.

“If you’re out of work, you may have to pause debt repayment and take care of survival,” says Jennifer Streaks, personal finance expert and author of the book, “Thrive!…Affordably.” She suggests transitioning to minimum payments and reaching out to your lender to get an accommodation on payment terms.

With any lender (including credit card issuers), we recommend contacting them as soon as you anticipate problems making a payment. Letting a lender know you have been laid off or furloughed, for example, can lead to more leniency on the terms of your loan. Shying away from this talk can lead to missed payments on your credit history, which will impact your credit score and harm your candidacy as a future borrower.