Peer-to-Peer Lending for Bad Credit

People generally opt for peer-to-peer lending when they find it difficult to borrow money from banks and credit unions. The most common reason for the difficulty experienced in borrowing can be attributed to the lack of credit-worthiness on the part of the consumer. A poor credit rating acts as a deterrent to availing loans at a reasonable rate of interest. Sometimes, consumers would like to borrow small sums of money to meet ongoing expenses. The problem with traditional lenders is that, they do not lend sums less than $3000 or so, even if the borrower does not have any collateral to offer. However, borrowing without a collateral at a favorable rate of interest is possible only if the consumer has good credit scores and credit history. Hence, peer-to-peer lending for bad credit consumers assumes a great deal of significance.

The Growth of Peer-to-Peer Lending Services
Prior to the sub-prime crisis, people were able to borrow money by using their built-up home equity as collateral. The fall in the price of real property left most consumers with negative home equity. Thus, home equity loans and home equity lines of credit were no longer feasible. The consumer had to start relying heavily on other secured and unsecured loans. Secured loans required a collateral that most consumers did not possess while unsecured loans were disbursed on the basis of the credit worthiness of the consumer. These issues gave rise to peer-to-peer lending. With bad credit no longer being a deterrent to availing small loans, consumers started flocking to the lenders (P2P) for the same.

How Does Peer-to-Peer Lending for Bad Credit Work?
Peer-to-peer lending services work by bringing together lenders and borrowers. The lender is expected to set-up an online account and deposit funds via ACH (Automated Clearing House), wire, check or PayPal. A borrower who is interested in availing loans, is expected to apply online and post his/her requirements, viz. loan amount, the reason for the loan, the credit scores, the existing level of debt and other relevant information. Although the borrower's credit score is taken into consideration, the lenders tend to diversify their risk by lending small amounts to a large number of borrowers. Lenders can lend as little as $50 to the applicants. Even if a few bad credit consumers do default, the chances of the lender recovering the principal and the interest on other loans is a distinct possibility. The lenders stand to gain in the form of interest and principal on the money that is lent. Moreover, they are not charged an account maintenance fee.

The borrower has the opportunity to avail loans at a reasonable rate of interest since lenders are allowed to bid on loans of their choice. Since the loan is sanctioned by the lowest bidder, the auction process has the effect of bringing down the rate of interest on the amount that is lent. The borrower is also given the opportunity to state his/her case and try and convince the potential lender of the prudence of sanctioning a loan to the former. The application process is free and this provides a small measure of comfort to the cash strapped borrower.

In addition to providing a platform for the borrowers and the lenders, peer-to-peer lending services are responsible for verifying the authenticity of the information supplied by the consumers and complying with the regulatory requirements. Lending services also deduct the amount of interest and/or principal from the bank account of the borrowers and dispatch the same to the lenders. The lending services make money by levying a fee, on the borrowers and the lenders, for servicing the loan. Finally, person to person lending for bad credit consumers can help people with poor credit build their credit scores and credit history since these lending services communicate the account information to the credit bureaus.