It’s not unusual to find yourself needing a loan. Every expense is not always in our budget. And the money is not always in our savings or checking account. But what’s the difference between a bank loan and a peer-to-peer loan?
Actually, there are major differences. Most importantly, if your credit score is not excellent, your bank loan application will be rejected. You might be able to revive it if you are able to comply with a lot of additional requirements.
So, how is it that you can get a peer-to-peer loan and not a bank loan?
Banks offer two kinds of loans: secured and unsecured. If you are applying for a small loan, typically the bank will provide an unsecured loan. The payback period is shorter and the interest is fixed.
If you need a larger loan, the bank will offer a secured loan. This means that you must put up collateral, such as property. You may also need a co-signer. This loan is also for a fixed term and the interest rate is fixed. The difference is that if you fail to make the payments, you could lose the collateral.
Peer-to-Peer Lenders are not Banks
Peer-to-Peer (P2P) lending has become one of the most successful financial technology platforms in the world. P2P lenders are creating lanes for consumers who typically have been shut out from accessing loans. These include consumers with lower credit scores, no credit scores, or no assets to leverage.
Banks are Institutions.
Consumers come for loans, the bank provides the cash. Peer-to-Peer lending is about matching people with people, as its name implies. P2P brings together consumers who need a loan with investors looking for a viable investment asset.
Banks are bricks and mortar institutions. Even if they have online banking, they still maintain a physical office. Banks have much higher overhead. P2P lenders are online. The overhead is low. These savings can be passed on to you—the consumer.
Today, just about every bank has an online presence. But the difference between a bank loan and a peer-to-peer loan is that in the case of P2P, everything is done online. Utilizing your digital device, you can apply for a P2P loan from home, on the road, at the mall, wherever you are. If you work long hours or are a night owl, no problem—P2P lending platforms are always open.
Banks have operating hours. Even if you complete the bank’s online application, you still need to go in to meet with a loan officer. This requires time out of your day. The waiting period from start to finish is much longer. Even after approval, it can still take some time before you actually have the money.
The P2P application process is online and can be accomplished quickly. You get an answer right away and if approved, you have the funds in your account in time for you to use them toward your financial goal. If, for example, you need a debt consolidation loan, home improvement loan or wedding loan, a P2P lender is definitely going to be the better choice.
Another major difference between a bank loan and a peer-to-peer loan is the criteria used to determine your creditworthiness.
Banks pull your credit report and they look at your previous history with the bank, i.e, prior loans, lines of credits, the status of your checking and/or savings account. When the bank begins the process of determining your eligibility and pulls your credit report, it counts as a “hard inquiry,” which cause a slight drop in your credit score.
Peer-to-peer lenders utilize a combination of factors which run through unique algorithms that determine creditworthiness. The algorithm processes other information about you in addition to your credit score. P2P lenders will also pull your credit score, but at the beginning of the process it is considered a “soft inquiry.” Your credit score will not be impacted.
Peer-to-peer lenders in underbanked communities have developed even more radical algorithms for determining if the applicant is a credit risk. Some are looking at financial activity that does not necessarily show up in a credit score, including employment and social media activities.
What’s the difference between a bank loan and a peer-to-peer loan?
Plenty. In addition to helping you pay for what you need, a P2P loan will improve your credit score. The automatic payments mean you are never late!