Peer to Peer vs. Standard Signature Loans
Standard signature loans are offered by banks, credit unions, and other entities while peer to peer lending is the domain of private lenders.
Signature loans are unsecured meaning that financial institutions rely on your credit score, payment history, and other factors to determine whether the borrower is high risk or not. Banks apply strict rules and criteria to determine who qualifies for financing. There are different types to choose from personal loans
, including consumer, auto, and others.
The interest rate is usually fixed, and the outstanding balance is paid in installments. Borrowers with an excellent credit score are usually offered attractive interest rates. This is also a good way to build or rebuild credit and gain access to affordable borrowing solutions in the future.
Peer to Peer Lending
This is an option for borrowers who seek to bypass brick-and-mortar banks. There are online peer to peer lending platforms that connect borrowers and lenders. Websites that host platforms act as brokers. The goal is to make the process beneficial, convenient, and safe for all parties.
Similar to standard solutions, peer to peer loans are unsecured. This means that risk lies with lenders. They lose their capital in case of default – unpaid interest and the outstanding balance. Liquidity is another problem for peer to peer lenders because of the fixed term. They cannot request prepayment before the term is over. Selling their participation is an option but they may lose money.
To deal with these issues, many online platforms provide some credit background to lenders. This is done to reduce the risk of default. Another solution is to open a compensation fund and pool funds together. They can be used to cover a percentage of the losses in case of default. This is one way to improve liquidity. All these arrangements are being implemented to make online platforms safer and more attractive for investors. Of course, they result in higher overheads for the platforms and hence, they offer higher fees.
The main benefit for borrowers is that they are offered competitive interest rates. What is more, the approval process is quicker compared to brick-and-mortar financial institutions. Borrowers have access to small and modest lump sum loans.
Solutions for Borrowers with Poor Credit
Obviously, borrowers with tarnished credit are considered risky by both institutional and private lenders. Peer to peer lenders also take the applicant’s credit rating into account. Thus the options for unsecured loans
are more limited. One option is to wait until your credit score improves, but some borrowers face emergencies. Other options include secured and payday loans, cash advances, secured lines of credit, and others.
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