What Is A Peer-to-Peer Loan and Should I Consider It to Buy A Home?

What Is A Peer-to-Peer Loan and Should I Consider It to Buy A Home?

 In Blog, Real Estate Questions

Peer-to-peer lending also known as P2P lending is an increasingly common trend nowadays. Thanks to recent internet attention, many new homebuyers are considering a peer-to-peer loan as an alternative to traditional mortgages from a bank or housing lender. By 2025, P2P lending is expected to grow to an over 1000 billion U.S. dollars industry. 


The majority of P2P lending is for financing home improvements or paying off credit card debt. However, it’s increasingly common for homebuyers to consider P2P lenders for their mortgage. How exactly does a P2P loan work, and should you consider it when buying a home? 



How Peer-to-Peer Loans Works

First, let’s look at how peer-to-peer investing works. Think of P2P lending as non-banking banking. That might sound confusing, but it simply means you cut out the “middle man,” or the banker. Instead of borrowing money from a bank or mortgage lender, you use a peer-to-peer platform to borrow directly from investors. 


As a borrower, the terms of your repayment and interest will depend on your particular agreement with your investors. Usually, this is through a P2P lending network which will set some parameters for everyone. There are a lot of benefits to using a P2P network rather than going the route of the traditional mortgage, mainly that you get to skip the costly and time-consuming banking process. 



Why Consider Peer-to-Peer Loans

Now that you know how P2P investing works, why is it a decent option for the right homebuyers? The main perk is that it’s simply faster. Homebuyers who want a mortgage through a bank will have to go through lengthy, traditional lending methods that aren’t time efficient. 


When you borrow directly from peers, you can get fast funding in as little as a week. You also have more options for short-term rates with lower interest. The size of your loan is up to you, and this means more flexibility. Homebuyers who choose peer lending will have access to investors who they wouldn’t be able to reach normally. The most common lending groups or networks are Prosper and Lending Club. 



Should You Consider a Peer-to-Peer Loan?

Is a P2P loan the right choice for your mortgage? First, you’ll need to take a look at the costs and your current situation. While many think it’s easier to get a loan through a peer network, this isn’t always the case. Most of these networks like those listed above still have strict credit and income requirements to keep in mind. 


You’ll still need to go through a similar application process to a traditional mortgage, though you’ll likely have lower service fees and wait times. One perk of up-and-coming P2P mortgage platforms like San Francisco based SoFi is that your mortgage will usually close in under a month. However, this isn’t without its own risks. If you’re unable to make payments on time, the collection fees are very steep and make up for the lowered interest rates. 


Ultimately, P2P lending is a great option for buyers who want more flexibility with their mortgage. It’s becoming increasingly popular for Millennial buyers who have a hard time securing traditional mortgages. It’s also possible to choose a hybrid strategy with some P2P and traditional lending. It’s up to you to consider your options to decide the best method for buying a home today.

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