Peer-to-Peer Auto Loans Pros and Cons

Man hugging his car that he bought with a peer-to-peer loan
Photo: Matelly / Getty Images

The peer-to-peer auto loan is not exactly new. Years ago, before credit cards became a common resident in people’s wallets, if someone needed a relatively small, short-term loan, they would look to a family member or close friend. As we all know, borrowing money from friends or family can cause lots of personal problems. But still, if that was your only choice, then that’s where you went. Credit cards and small bank loans changed all of that, at least for most people. 

Now, with the advent of the internet (and with a pretty strong nudge from a bad economy), a new form of financing has appeared in the last few years: peer-to-peer lending. Peer-to-peer (also known as P2P) loans are growing in popularity in a number of areas, including auto financing.


Peer-to-peer lending, in general terms, refers to the practice of loaning money, typically to unrelated borrowers, through non-traditional means. By “non-traditional,” I’m talking about an institution that is not a bank, insurance company, investment firm, credit card company, or loan shark. That pretty much covers everyone in the lending business until now. 

Peer-to-peer lending was born on the internet, and early on, it relied on social networking to provide the “meeting place” for lenders and borrowers to get together. Today, however, a number of loan intermediary companies have appeared on the scene and have, for the most part, taken over the P2P market from social networks.

Things move pretty fast in the digital age. Peer-to-peer loans are a good example. They’ve only been around for a few years and might still be characterized as the “wild west” of financing. However, P2P loan sites, such as Lending Club and Prosper, are now attracting huge investors who are pumping hundreds of millions of dollars into them, which means that the P2P loan business is quickly becoming a well-established and legitimate member of the finance industry.

How P2P Loans Work

The general idea of a peer-to-peer loan is to match an individual lender to an individual borrower. P2P lending sites are where borrowers go to find a lender. The application process is actually pretty simple. Visit the site and fill out the online application. If you qualify, then you will be shown a list of potential lenders along with the terms and interest rates for taking out a loan. If you like what you see, then you finalize the loan and get your money. Sound great, doesn’t it? Not so fast.

Pros and Cons

There are a number of attractive reasons for considering a peer-to-peer auto loan. But, as you might expect, there are also a few drawbacks. We should note here that we are referring to the pros and cons from the borrower's point of view. If you are considering becoming a P2P lender, you can simply take these pros and cons and reverse them.


  • Loan seekers with less than perfect credit who cannot secure a loan through more traditional means may be able to find one on a P2P site.
  • P2P loan sites, in many ways, work like auction sites where the parties on both sides come to terms that are acceptable to both without the interference of a middle-man who determines the rates and terms for you and takes a cut.
  • P2P loans are (and this is important) unsecured, which means that a lender cannot repossess your vehicle if you fail to make your payments on time.  


  • If you are one of those loan seekers with bad credit mentioned earlier, be prepared to face very high (sometimes extremely high) interest rates
  • Just because your loan is unsecured doesn’t mean there are no real-world, negative repercussions waiting for you if you fail to make your payments. Just like traditional loans, if you do not meet your debt obligations, your credit rating and scores will take a big hit.
  • For a borrower, P2P loans may charge significant fees upfront, which may wash out if you pay the loan until the stated maturity. However, if you pay the loan off early by selling or trading in the car, you have no way to get those fees back, so you could be worse off than you were if you used traditional financing.

Are Peer-to-Peer Auto Loans Worth It?

Peer-to-peer loans are great in that they provide a real alternative to traditional loan options. Whether you sign on to one, however, is strictly up to you. No matter what you decide, just be sure that you read all of your loan documents and understand all terms completely before you commit. 

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