There are 3 main ways the interest rate of the P2P loan is set. In the first method, you can set the maximum interest rate you want to pay and let the lender decide whether they want to fund your loan. The borrower is likely to get an offer with a lower interest rate through an auction. If there is no lender willing to fund you, you can relist your offer at a higher interest rate.
In the second method, the interest rate is set by the peer to peer lending platform based on the borrower’s credit score. The loan offers on the P2P platform that match with your criteria will charge the same interest rate. In the third method, the interest rate of the peer to peer loans will depend on the demand and supply of the most recent lending activities.
The interest rate of a traditional bank loan are is variable but all P2P loans’ interest rates is always fixed. Variable interest rate means that the interest rate will constantly change which can cause problem for you to pay back the loan if the interest increase too high. As a result, you will miss payment and get penalized with a penalty interest rate.
The fixed interest rate of the P2P loans allows you to plan your cash flow properly. You have the freedom to prepay the loan at anytime and you won’t get any penalty fee for settling your loan in full. In a bank loan, you usually will have to pay a penalty fee if you want to settle the loan earlier than the due date.
The interest rate you get for a P2P loan is lower than bank loan because the online lending services don’t have to cover the expenses of the bank facilities or pay the salary of the staff. In online P2P lending, software is used to approve as well as setting the interest rate of the loan.
The average interest rate you get in a P2P loan is 5.5% or more. You may be charged with fees depending on how much loan you applied for. The origination fee is already calculated in the APR and they will deduct it from the loan balance. Just like bank loan, many P2P loans will charge a late fee of about $15 for every 15 days you are late on making the repayment.
As you can see, P2P loan is easier to apply because you don’t need to have a good credit score. Many P2P lenders would be willing to lend you money without looking at your credit score. This makes the lending process easier compared to bank where the bank staff will check your finance in many ways to make sure you are not a risky borrower.