A Guide to P2P (Peer-to-Peer) Student Loans

Written by: Kristyn Pilgrim
Updated: 9/08/20

A loan is typically obtained from a bank or financial institution; however, individuals may choose to borrow from another individual or an investor. These loans are referred to as peer-to-peer (P2P) loans.

This alternative method of financing can be applied to many situations in life, including college financing. If you have exhausted your federal and private student loan options, along with other financial aid, but still need help with covering your college education expenses, a P2P student loan might be the best financial route for you. 

What Makes a P2P Student Loan Different From Other Student Loans?

Unlike traditional student loans administered by the government, a college or university, bank, or private lending company, P2P student loans are loans that are handled person to person. 

One individual — the student — will be matched to another individual who will act as their lender. These lenders could be friends, family members, colleagues, local organizations, and even strangers. Students can also borrow from multiple lenders to reach the required amount needed for their educational funding.

A P2P student loan might be necessary because a student may not qualify for other student loans, or they are looking for a better interest rate than what other financial institutions offer.

How Do P2P Student Loans Work?

Ready to get started with your P2P student loan? Just like with any student loan, there is an application process, and just like with private student loans, you will have your credit checked so that the lender can deem you eligible for the loan. 

You might be asked to provide details about yourself and your education, as well as how the loan will be used. Some P2P loans can be provided to you quickly, while others will take time. It all depends on the lender you have chosen. 

Repayment can be made electronically via automatic payments, and it is critical to make payments on time. Even though you are dealing with individuals, and not a government agency or bank, how you repay your P2P student loans will still affect your credit. You can build your credit by making prompt, on-time payments, and there are typically no penalties for prepayment. This can be beneficial because you will save money on interest.

Students can find a lender with the help of a P2P lending website. These websites determine the interest rates and repayment terms and handle all of the money transfers and payments. 

There are many sites to consider when pursuing P2P student loans. They all have criteria for eligibility, and they differ in rates and amounts, as well as who they are looking for as the ideal lender and borrower. 

One thing to note when deciding which platform to use is that not all websites allow for student loan funding. An example is Peerform, which restricts lenders from funding any education-related expenses. Some websites restrict the location of the lenders or borrowers, as well. Before you begin the application process, make sure to check that student loan borrowing is allowed.

To better understand the P2P student loan application process, here is an example of a typical scenario:

  • You will apply online with the P2P lending site, which will most likely include a credit check.
  • The lending site will rate your application based on their criteria, which will also help to determine the interest rate and terms offered. This proposal will include all of the details for the funding, and it is up to you, as the student borrower, to accept the terms they have offered. If all looks good to you, you can proceed. 
  • You can then add details to your loan request for potential lenders to review, detailing what the money will be for and why they should invest their money in you. You may want to consider sharing your backstory, your educational goals, and your future aspirations in hopes of attracting interest. After all, these lenders will be investing in your education, so it’s smart to give them a glimpse into the life of the college student who they will be helping to succeed.
  • Once you have accepted a loan from an investor, it’s time to move forward. The website will handle the transaction of the loan from the investor into your bank account, as well as your monthly payments to the investor.

Pros and Cons of P2P Student Loans

It’s always a good idea to weigh the pros and cons of any loan before borrowing money. Using this type of alternative loan can be beneficial for students who are looking for lower interest rates, but there could also be more risk involved. 

Here are four primary benefits of borrowing a P2P student loan:

  • Interest rates are often going to be much lower because you are borrowing from an individual and not a corporate entity that has to cover things like overhead costs and employee salary.
  • P2P lending can be more personal than borrowing from a government agency or bank, especially for lenders who want to know who they are lending money to and for what. Perhaps the lender chooses the student based on their education or career goals or because of their ambition to succeed in their chosen career. There is some sense of a personal relationship between the student borrower and lender, where the lender is there to help them achieve their goals.
  • A P2P lending platform is very active and engaging and can allow the students using P2P student loans, as well as the lenders, to share their experiences, ask questions, and stay in the know about what is going on in the P2P lending world.
  • P2P student loans can be less of a hassle to find and apply for, and the approval process can happen pretty quickly. 

Here are four main drawbacks when borrowing a P2P student loan:

  • You do need to have a good credit score to be approved. The average FICO score is around 670 to 739. Many P2P loans will consider scores in the mid-600s or higher and even those without much of a credit history. However, the lower your score, or if you have no score at all, your loan might be more costly because the interest rate won’t be as good.
  • Although your personal information is kept secure on P2P lending platforms, you do need to almost “sell yourself” when explaining your need for a loan to win over the investors. It might not be the best option for you if you are uncomfortable with divulging the details of your personal life and financial situation on the P2P platforms. 
  • Unlike with federal student loans and some private student loans, P2P student loans do not have the same kind of protections and benefits; in other words, there is no option to defer your loan payments or qualify for student loan forgiveness. 
  • P2P student loans are often short term. Although there are lending sites that might have different programs for their repayment plans, lenders typically expect to be paid back within one to three years. This might not be a reasonable time frame for some students to pay back their loan in full, plus the interest it has accumulated.

Learn More With CollegeFinance.com

CollegeFinance.com is a good resource to have on hand as you search for ways to finance your college education. Having all the necessary and up-to-date information is important when financially planning for school. 

At CollegeFinance.com, we provide students and parents with everything they need to know about federal student loans, private student loans, and any other type of financial aid option. Our experts are here to help as you plan for your future — and we are here to ensure it is a successful one.