Released: June 21, 2012

Survey: Wide range of interest rates and fees for P2P borrowers

Consumer group offers advice for wise loan choices and a guide to credit-builder loan programs

San Francisco — Today Consumer Action releases its survey of the major P2P lending sites in the summer issue of Consumer Action News. The publication also contains findings from the organization’s research into legitimate loan alternatives for consumers with no credit history or damaged credit who have few, if any, borrowing opportunities.

P2P lending sites facilitate loans between individuals

Consumer Action compared the three major P2P lending websites—Lending Club, Peerform and Prosper. Promoted as a more accessible and less expensive option for borrowers, P2P loans have their advantages, but they’re not without their costs—and they’re not an option for all consumers. Borrowers must have the requisite minimum credit score (mid-600s) as well as meet other requirements related to creditworthiness. They also must have a Social Security number and live in a state where a P2P company does business.

Consumer Action found that the cost of a P2P loan for highly rated borrowers can, indeed, be competitive, but interest rates and fees get steep for borrowers with lower ratings on each company’s proprietary loan grading scale. APRs ranged from 6.5% to 35.8%. Origination fees ranged from .31% to 5.5% of the loan amount. So a borrower who takes out a $10,000 loan could pay as much as $550 in fees. All rates and fees are based on an individual’s rating.

Loan terms range from one to five years and minimum/maximum loan amounts range from $1,000 to $35,000. But not all sites offer all terms or amounts, and not all borrowers qualify for the maximum loan amount or term.

Although P2P loans may seem less formal than a bank loan, they are every bit as binding, with similar consequences for late and missed payments, including negative reporting to the credit bureaus, late fees and potential legal action.

Improving the odds of qualifying

Consumer Action found these steps can improve a borrower’s chances of getting a P2P loan and a reasonable interest rate:

• Make a strong case for your loan in your listing and in your responses to investor questions.
• Don’t shop for credit in the six months before applying for a P2P loan.
• Tweak the loan amount and term to reduce the interest rate. (Even a slightly lower loan amount can move you into a bracket with a lower rate.)

Find out more about these and other tips in Consumer Action News. For those debating between a P2P loan and a credit card, the newsletter includes a comparison of the pros and cons of each option.

Resource for consumers with low/no credit scores

Since a strong credit history is so important to financial prosperity, some non-profit organizations offer special loan programs that enable people with credit problems, or who are new to the U.S. credit system, to borrow and build a credit history. These credit-builder loans are generally small, short-term loans that require no collateral and no minimum credit score, and payments are reported to at least one of the three major credit bureaus.

Consumers who use credit-builder loans and participate in lending circles (groups that work on building credit together through a communal loan fund) can see their credit scores improve dramatically in a short time with on-time monthly payments. But the programs are not always easy to find.

Consumer Action has created a directory where consumers can locate and learn about credit-builder loan programs and lending circles in their state. The list will be updated as new programs come to light. (Click here to learn more about these programs and to download the directory.)

“Credit is as important as ever—to achieve goals or simply to qualify for necessities such as utility service, insurance and even some jobs—but traditional lenders don’t always come through for consumers,” said Linda Sherry, director of national priorities for Consumer Action. “We’ve taken a close look at some alternatives that could offer a solution for many consumers. We’ve spelled out the key information so they’re prepared to make informed, intelligent borrowing choices.”

All P2P survey data and loan program research can be accessed from our "P2P and credit-builder loan programs" page.

As a reminder, consumers also can establish a good credit history by opening a secured credit card, which is backed by money the cardholder deposits in a linked savings account. A secured card offers immediate access to a credit line, which is not the case with all credit-builder loan programs. Secured card issuers regularly report your payment history to major credit bureaus. (For information about the costs and benefits of secured cards, read Consumer Action’s Secured Credit Card Survey and newsletter.)

# # #

About Consumer Action

Consumer Action has been a champion of underrepresented consumers nationwide since 1971. A nonprofit 501(c)3 organization, Consumer Action focuses on financial education that empowers low- to moderate-income and limited-English-speaking consumers to financially prosper. It also advocates for consumers in the media and before lawmakers to advance consumer rights and promote industry-wide change.