Hey everyone, thanks for joining me for this week’s Finance Talk with Josh! Throughout the past couple of weeks, I’ve been talking about peer to peer lending from an investment standpoint. However, these days, more and more people seem to be using the option from a borrowing standpoint as well. So, I figured I’d dive into that and see what kinds of conversations we get into. In today’s article, we’re going to look at the difference between borrowing from a major bank and taking advantage of peer to peer lending as a borrower. Hopefully, by the end we’ll be able to answer the question asking which option is better.
Borrowing From Banks
The traditional way of borrowing money is to find a bank that you know and trust. These days, there’s tons of options both online and off. So, what are the benefits of borrowing from banks?
- Keep All Of Your Accounts In One Place – When looking for a loan from a major bank, chances are, you’re going to look to the same bank that you have your checking and savings accounts with. Not only have you already built a relationship with that bank, it’s much easier to log into one account and manage all of your financial accounts than it is to log in through several different banks. This issue becomes even more pressing when one or all of your financial accounts are with separate banks that don’t provide online services.
- There’s Power In Experience – Most banks that you would look to for a loan have been in business for decades at the very least. That experience helps to ensure that you’ll get quality service. However, peer to peer lending is such a new concept that there are few businesses that have been doing it for even a full decade.
- More Options – Most banks offer several different lending options, each designed for a specific purpose. For instance, if you’re looking to buy a car, you’ll find secured auto loans, if you need money to keep you afloat, you may look into personal loans. If you’re looking for a way to bring down interest on debts, a debt consolidation loan could be in order. Most banks offer a wide range of loan types and have great representatives to explain these different loans to you.
So, what are the down sides to working with major banks?
- Cost – The biggest downside to working with major banks as apposed to peer to peer lending is the cost difference. When working with banks, you work with professionals at a brick and mortar location in most cases. The services that banks offer require more money to maintain than a simple online platform. Therefore, that added cost trickles down to the consumer.
- Poor Customer Service – One of the biggest complaints that you hear about most major banks is that they lack in customer service. With smaller, peer to peer lending companies, consumers tend to have a better experience.
Borrowing From Peers
Peer to peer lending is a new concept that has been really picking up speed lately. In peer to peer lending, consumer investors decide to fund loans for other consumers with the promise of earning interest on those loans. Lets see how this option stacks up from a borrower’s perspective, starting with the benefits.
- Lower Cost – The biggest benefit to borrowing on a peer to peer lending platform is the lower price you find yourself paying to borrow that money. Because peer to peer lending companies work mostly online, there is little overhead to be covered. Also, those funding the loans are fellow consumers. Of course they are looking for profit in interest rates, but they don’t generally require you to pay such high interest.
- More Flexibility – When looking into peer to peer lending, you’ll find that the requirements are much more flexible on the borrower’s side. Depending on who’s funding the loan, you may not have to meet stiff income to debt ratio requirements and even stiffer credit score requirements.
- Lower Monthly Payments – Because peer to peer lending loans come with much lower interest rates than standard loans from banks, you tend to have much lower minimum monthly payments.
Now, the cons to peer to peer lending.
- Unregulated Industry – Peer to peer lending is an unregulated industry. Therefore, lenders can essentially propose whatever terms they want, and if you want the loan, you must abide by these terms. However, I haven’t seen one instance yet that has shown any unfair lending practices by peer to peer lenders.
- Hard To Find People To Fund Large Loans – If you’re looking to buy a car or a house, this isn’t going to be the option for you. You could find yourself waiting years, and still not having someone willing to fund a $20,000 auto loan or a $200,000 mortgage. The bottom line is, peers tend to only want to fund the smaller loans.
Both options are honestly great options. Banking with large, trusted banks has been working for a long time, and I don’t see that going away. However, if you’re looking for a small loan at a fair price, peer to peer lending may be just what you’re looking for.
Have you ever taken part in peer to peer lending as the borrower? If so, how’d it work out? If not, is it something you’d consider?