Peer-To-Peer Lender Borrower Beware

September 23rd, 2009 by Reed Allmand

There’s an interesting article in the Star-Telegram about the increase in the number of peer-to-peer loans for college students.  The author cites a contraction of student loan lending and restrictions on credit card lending to students as a major factor contributing to the uptick in the number of peer-to-peer loans amongst college students.

The article said:

“As credit continues to be tight, college students are increasingly turning to peer-to-peer loans, usually over the Internet, to fund their share of higher-education expenses.”

The way it works… Students can take out loans through websites from anonymous lenders or they can be paired with specific lenders such as credit unions, community banks, corporations and foundations.  But students who are using alternatives to supplement or replace student loans should proceed with extreme caution. Ask yourself the following questions before you sign on for a peer-to-peer student loan to fund your college education:

1. What is the interest rate?  Student loans obtained from the government offer dirt cheap interest rates, be prepared for higher rates from peer-to-peer lenders.
2. When do you need to repay the student loan? Government student loans don’t need to be repaid until after you finish college. Peer-to-peer lenders may not want to wait that long.
3. Do they offer deferments/forbearance? Government student loans usually offer deferments for as long as 3 years, plus you don’t need to repay them while in school. Find out if peer-to-peer lenders are offering some of the perks of traditional student loans.

Most likely peer-to-peer student loans do not offer the same terms as traditional student loans; but they may be good for small loans.  But before you sign on the dotted line, check and double check the terms of the loan.