Charles Krupa/AP/File
Susan Locke, left, hands her money to Michele Velleman as she purchases a table in the "online safe zone" outside the police station in Georgetown, Mass.

How peer-to-peer lending has changed the game

Peer-to-peer lending connects people with a little extra cash with those in need, a process which is infinitely better, both for the consumer and the economy, than options like taking out a payday loan.

Peer-to-peer lending isn't a new concept, but in the past decade, it's really taken off online. Peer-to-peer lending connects people with a little extra cash with those in need, a process which is infinitely better -- both for the consumer and the economy -- than other options, like taking out a payday loan.

One of the major P2P lending agencies in the United States is Prosper. Prosper offers loans up to $35,000 and charges a five percent closing fee. All the money loaned through Prosper comes out of the pockets of regular people all over the country. These loans are unsecured, meaning your qualification for them is based on your credit history, but you don't need perfect credit to get one.

What can you use a P2P loan for?

You can use a peer-to-peer loan from Prosper for just about anything, but there are a few reasons that make the most sense from a financial perspective. An obvious one is debt consolidation. A loan from Prosper is likely to be at a lower annual interest rate than a credit card bill. This will help you pay back your bills faster, and will mean your payments actually go towards paying off the principal, not just more interest.

Another common reason to take out a P2P loan is for home improvement. Typically, home improvement loans are funded through home equity loans from banks or credit cards. Home equity loans can take a long time to get approved and usually come with some hefty fees, which is why many finance-savvy home renovators are turning to companies like Prosper instead.

Business loans are a great way to expand a business through added capital, and are also made easier through P2P lending. While the traditional method requires getting tenuous approval from a bank, when you use Prosper, the only thing you'll need is a decent credit score.

Need to get around? Prosper can also be used for auto loans, which can save you the money you'd spend on financing and get you a much sweeter deal on your new whip!

Finally, you can use P2P lending elective surgeries, short term loans, and much more, as there's no penalty for paying it back early.

Now that you know how to use Prosper, here are my top four reasons why you should:

1. Prosper offers lower interest rates.

Payday loans typically charge obscene amounts of interest, which can sometimes be as high as 574 percent in some states. P2P lending sites like Prosper typically charge between 5.9 percent (for very good credit) and 30 percent APR (for fair credit), which can be much less than what your credit card company is charging you. Which would you rather pay? Nearly 600 percent interest, or 30? I think I can guess your answer to that.

2. You don't need stellar credit.

P2P lenders vet potential customers well, and while you probably won't be able to get a substantial loan with terrible or no credit, you don't need to have the 700+ rating required by most banks: Prosper offers loans to people with "fair" credit scores starting at 640.

3. You can borrow a lot of money.

Prosper allows you to borrow up to $35,000, which could mean a down payment on a house, a brand new car, or even the ability to pay off a high-interest student loan.

4. There's no penalty for paying it back early.

Banks often charge a prepayment fee on their loans in an attempt to keep you locked in to your monthly payments for longer. If you come into enough money to pay off the loan early, you'll be charged a fee -- often hundreds of dollars -- to make up for the money they're losing in interest. But P2P lending agencies likeProsper won't charge you a cent extra to pay off your loan early. Sure, the lender won't make as much money in the long run, but it's an ethically sound policy that's a huge benefit for borrowers.

This article first appeared in Brad's Deals.

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