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Home Equity Loan Alternative: Peer Lending

One of the types of lending that has increased in popularity since the start of the recession is person-to-person (P2P), or peer, lending. With the credit crunch after the 2008 financial crisis, many people found it difficult to get loans from banks. As a result P2P lending began filling the gap.

P2P lending allows borrowers to get loans from their peers. Third parties like Lending Club [3] facilitate the transactions, helping borrowers and lenders connect. Lenders can fund a loan for as little as $25, allowing for multiple lenders. Then, the third party takes care of the logistics of issuing loans and collecting payment. It makes it a little easier for all involved. Borrowers get a loan that the bank may not have given them, and lenders receive a return on an investment.

While this model has worked well for some small business start-up loans, and for debt consolidation, some are now pointing out that P2P lending can work well as a substitute for home equity loans — which can still be hard to get.

Using a Peer Loan Instead of a Home Equity Loan

Even though the credit market has eased some in the last year or two, it can still be difficult, in some places, to get a home equity loan. In some markets, even if you have good credit, getting a home equity loan is impossible because your mortgage might be underwater. Consider: In some of the hardest-hit real estate markets like South Florida, Arizona and Nevada, you could be a few thousand dollars underwater. It doesn’t matter that you have an excellent credit, or if you are up to date on your mortgage payments. Many banks won’t give you a home equity loan — even for improvements — if you have the negative equity.

This is where P2P lending can help. If you are interested in making home improvements, but you can’t get a home equity loan from the bank, it’s possible to get an unsecured personal loan. Lending Club offers unsecured personal loans of up to $35,000 at reasonable rates. No, you won’t get the same rate as you would on a home equity loan. However, if a home equity loan is off the table, a low rate unsecured loan is your next best bet. P2P lending can help you get the money you are looking for. If you have excellent credit, you will qualify for the best interest rate, and you will be more likely to attract lenders willing to fund your request.

Additionally, the application process for a P2P loan from a site like Lending Club [3] is often simpler than one for a home equity loan. Home equity loan applications can be a huge hassle, with appraisals and multiple forms. With P2P lending, you are getting a personal loan. Your identity and creditworthiness will have to be established, of course, and your bank account verified for funding purposes, but the loan request form is fairly simple. It takes much less time to fill out than going through the hassle of a home equity loan.

If you have been turned down by the bank for a home equity loan, and you would really like to be able to make home improvements, or use the money for some other purpose, consider a P2P lending. It might be just the thing.

(Photo: USDAgov [4])