THE BLOG
01/30/2015 11:38 am ET Updated Mar 28, 2015

5 Perks of Peer-To-Peer Lending

By Laura Woods, Contributor

Searching for an alternative to traditional financing? Or maybe you're looking for a new way to invest your money? If so, peer-to-peer lending could be exactly what you need. This personal loan platform connects investors in search of returns that are higher than banks are paying with borrowers seeking loans of $1,000 to $35,000. Interest rates are set based on the borrower's credit score and investors have the option to choose the risk level they're willing to take. And rather than fronting the money for one loan, an investor's funds will be split across a number of loans, each of which he can review and approve.

Though P2P lending is a relatively new method, the industry's two largest platforms, Lending Club and Prosper Marketplace, have made it possible for borrowers to receive more than $8 billion in loans to date.

Related: P2P Lending: Funding an Education

Thinking about joining the P2P lending phenomenon? Here are five things to know about using peer-to-peer lending.

1. Attractive Interest Rates

P2P sites offer borrowers competitive interest rates based on their credit history and payback timeline. For example, Prosper currently offers a baseline APR of 6.73% APR. Borrowers aren't the only ones benefitting from the rates ─ investors can also realize above-average returns. For example, Prosper offers returns ranging from 5.48% on the lower risk side to 11.78% for higher risk investments.

2. Quick Funding Speed

Borrowers don't have to endure a long waiting period to receive the funds they need. In fact, funding takes an average of just one to three weeks, according to the size of the loan. Conversely, it can take months to receive the funds from a traditional bank loan ─ precious time you might not have when you need money now.

3. Ability to Tell Your Story

Banks take a very black or white approach to loan applications ─ if you have bad credit, there's a good chance you won't get a loan, and if you do, it will likely come with a prohibitive interest rate. However, P2P lending gives you the chance to explain why you have bad credit, allowing investors the chance to give you a break.

4. Fewer Fees to Pay

Traditional bank loans come with a variety of fees, such as an application fee and a processing fee that increase the total cost of your loan. P2P lending sites like Prosper and Lending Club charge just one origination fee to screen borrowers and issue loans. These fees are taken from the loan immediately and that's it ─ no hidden fees or costs. For example, Prosper's origination fees range from 1 to 5 percent of the total loan and Lending Club charges 1.1 to 5 percent of the amount funded.

5. Significantly Cheaper than Credit Cards

Taking out a P2P loan to pay off credit card debt can offer significant savings. If you're able to get a lower interest rate on a P2P loan, you can pay off your credit card, cut up the plastic and get out of debt in a much quicker time period. In fact, borrowing from P2P loans can be up to 70 percent cheaper than credit cards, according to LendingRobot, a cloud-based financial service.

Top P2P Lending Apps

Want to learn more about P2P lending or need the ability to manage your accounts from anywhere? Check out the following four P2P lending apps:

Related: 12 Highest-Rated Bank and Credit Union Apps

1. LendingClub Investor

Download the Lending Club app to manage your lendingclub.com peer-to-peer lending accounts from anywhere. The app supports multiple investor accounts, allows you to browse and order notes, quick fill orders, assign ordered Lending Club notes to portfolios and more. It's available for $4.99 on both Apple and Android devices.

2. Peer to Peer Lending from Udemy

Learn all about peer-to-peer lending in this educational app from Udemy. You'll gain lifetime access to 15 informative P2P lectures, including "What is P2P Lending? What does P2P Mean?" and "Traditional Bank Loans vs. P2P Loans." Enjoy the ability to learn on-the-go with video lectures, audio lectures, presentations and more. This free app is available for download on Android devices.

3. Kabbage

Specializing in small business loans, the Kabbage app allows you to conveniently manage your accounts from anywhere. Take your funds on-the-go, pay your bills and view your transaction history from your smartphone. This free app is available for both Apple and Android devices.

4. P2P Investment

This app helps people who want to lend money connect with those who want to borrow it. The borrower inputs the amount of money needed, explains the reason for the loan and posts his listing online for investors to fund. Download this app for free on Android devices.

Photo credit: bobbi vie