What Is Peer-to-Peer Lending?
Understanding P2P Lending
Peer-to peer (P2P) Lending
Special Beacons
Peer-to-Peer Lending Q&As

Personal Loans and Lending

What is Peer-toPeer (P2P) lending? Definition and How It Works
By Julia Kagan
Updated 20th December, 2022
Reviewed by Thomas J. Catalano
Fact checked by Amanda Bellucco-Chatham
What is Peer-toPeer (P2P) lending?

Peer-to peer (P2P) lending allows individuals to obtain loans directly from other individuals eliminating the financial institution as a middleman. Websites that support P2P lending have greatly grown in popularity as a different way of financing.

P2P lending is also referred to by the name of "social lending" or "crowd lending." It's only been available since however, the list of competitors already comprises Prosper, Lending Club, Upstart, and StreetShares.
The most important takeaways

Peer-to peer (P2P) lending is a kind of technology in finance that lets people lend or take funds from each other without going through banks.
P2P lending sites connect borrowers directly to investors. The website sets rates and conditions and facilitates the transactions.
P2P lenders are investors who wish to receive more money from their savings in cash that they would receive from a savings account at a bank or a certificate of deposit.
P2P borrowers seek an alternative to traditional banks, or the possibility of a lower interest.
For P2P, the default percentages for loans are higher than the default rates for traditional finance.

Understanding Peer-to-Peer Lending

P2P lending websites connect borrowers directly to lenders. Each website sets the rates and conditions and facilitates the transaction. Most sites have a wide variety of interest rates depending on the creditworthiness the applicant.

The investor first opens an account with the site and deposits funds to be distributed in loans. The loan applicant submits a financial profile that has been assigned risk class that decides on the interest rate the borrower will be charged. The loan applicant is able to review offers and decide to accept one. (Some applicants split their requests into chunks and accept multiple offers.) The money transfer and monthly installments are managed by the platform. The process is completely automated, or lenders and the borrowers are able to negotiate.

Some sites specialize in particular types of borrowers. StreetShares, for example, is specifically designed for small businesses.1 And Lending Club has a "Patient Solutions" category that connects physicians who provide financing options with potential patients.2
The history of Peer-to-Peer (P2P) Lending

Early on P2P lending was a popular option. P2P loan system was thought of as a way to provide credit access to people who would be spurned by conventional institutions or a way to combine student loan debt with a more favorable interest rate.

In recent years but, P2P lending sites have expanded their reach. They are now targeting consumers who are looking to pay off credit card debt with an interest rate that is lower. Improvement loans as well as auto finance are also available at P2P lending sites.

The rates for applicants with good credit are often lower than comparable banks, but rates for those with poor credit scores could be higher. LendingTree.com For instance, listed personal loan rates from 5.99 percent to 35.99 percent as of December. 15 2022.3 Peerform posted loan rates with a range from 5.99% to 29.99%.4 The average interest rate for credit cards was 19.59% as of Dec. 14, 2022 according to CreditCards.com.5

for lenders P2P loans are a method to earn interest from their funds at rates that exceeds the rates offered by traditional saving accounts, or certificates of deposits (CDs).

Certain P2P sites permit lenders to start with an account with a balance as low as $25.
Special Beacons

Anyone who wants to lend money using a P2P lending site must be aware of the possibility that their borrowers could default on their loans like traditional banks are prone to do. Research of P2P lenders has revealed that defaults are more common than those facing conventional financial institutions sometimes more than 10%.6

By comparison, the S&P/Experian composite index of default rates for all types of lending for U.S. borrowers has fallen from 1.55% to 0.59 percent over the 10 years prior to November of 2022.7

Anyone who is considering a lending site through P2P must also look into the fees on transactions. Every website makes money in different ways However, commissions and fees may be charged at the expense of the borrower, the lender the borrower, or both. Similar to banks, sites might charge loan origination fees, late fees, and bounced-payment fees.
Is peer-to-peer lending (P2P) safe?

Peer-to-peer lending is riskier than the savings account or certificate of deposit, however the interest rates are usually much higher. This is because those that invest on a peer-to-peer lending site take on the majority of the risk. This is typically the responsibility of banks or any other institutions of finance.
How big is this market of peer-to-peer (P2P) credit?

The global peer-to-peer lending market was valued at $83.79 billion as of 2021, according to figures from Precedence Research. This figure is projected to rise to $705.81 billion by 2030.8
How can you make an investment in peer-to peer lending?

The easiest way to invest in peer-to-peer lending is to make an account with a P2P lending site and then begin lending money to the borrowers. The majority of these sites allow the lender to choose the profile of their borrowers and allow them to choose between high risk/high return or lower returns. Additionally some P2P lending websites are public firms, and one could also invest in them by buying their shares.
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