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

Personal Loans and Credit

What is Peer-to-Peer (P2P) Loans? What is its definition and how it works
By Julia Kagan
Updated 20th December, 2022
Written by Thomas J. Catalano
Facts verified by Amanda Bellucco-Chatham
What Is Peer-to-Peer (P2P) Loans?

Peer-to peer (P2P) lending allows people to get loans directly from other individuals eliminating the financial institution as the middleman. Websites that facilitate P2P lending have significantly increased their adoption as a way of financing.

P2P lending is also known by the name of "social lending" or "crowd lending." It has been in existence since however, the list of competitors already comprises Prosper, Lending Club, Upstart and StreetShares.
Key Takeaways

Peer to peer (P2P) loan is one type of technology in finance that lets people loan or take funds from each other without going through a bank.
P2P lending sites provide direct access to investors for borrowers. The website sets rates and conditions and facilitates the transactions.
P2P lenders are individual investors who want to get a better return on their cash savings that they would receive from a bank savings account or a certificate of deposit.
P2P lenders are seeking an alternative to traditional banks or an interest rate that is lower.
The default rates for P2P loans are more than traditional finance.

Understanding Peer-to-Peer Lending

P2P loan websites link borrowers with lenders. Each site sets rates and conditions and enables the transaction. The majority of websites offer a broad choice of interest rates that are dependent on the creditworthiness of the person who is applying.

An investor creates an account with the website and then deposits money to be dispersed in loans. The loan applicant submits an financial profile which will be assigned an risk classification that decides on the interest rate the applicant will pay. The loan applicant has the option of reviewing offers and decide to accept one. (Some applicants cut their requests into pieces and take multiple offers.) The money transfer and the monthly installments are managed by the platform. The process can be completely automated, while lenders and customers can decide to haggle.

Certain sites are specialized in certain types of borrowers. StreetShares, for instance, is designed specifically for small businesses.1 Additionally, Lending Club has a "Patient Solutions" category that connects doctors who offer financing programs with prospective patients.2
History of Peer-to-Peer (P2P) Lending

In the beginning P2P lending was a popular option. P2P lending system was thought of as providing credit access to people who might be rejected by conventional institutions or an opportunity to combine student loan debt at a more favorable interest rate.

In recent times but, P2P lending sites have expanded their coverage. The majority of them target customers who wish to settle credit card debt at a lower interest rate. Improvement loans as well as auto finance are also available on P2P lending websites.

The rates offered to applicants with good credit tend to be less than similar bank rates, while rates for applicants with sketchy credit records may go much higher. LendingTree.com For instance, provided personal loan rates from 5.99% to 35.99 percent as of Dec. 15 2022.3 Peerform posted loan rates in a range of 5.99% from 29.99%.4 The average credit card interest rate was 19.59 percent as of Dec. 14, 2022 according to CreditCards.com.5

For lenders, P2P loans are a method to earn interest for their money at a cost that exceeds those offered by conventional bank savings or certificate of deposit (CDs).

Certain P2P sites allow lenders to start with an account that has a balance of just $25.
Special Takes into Account

Anyone who wants to lend money via P2P lending platforms must be aware of the possibility that their customers will fail on their loans, just as conventional banks do. Studies on P2P lending platforms has shown that defaults are much more frequent than those faced by banks that are traditional, often more than 10%.6

In contrast, the Index of the S&P/Experian Composite index for defaults across all kinds of loans made to U.S. borrowers has fallen from about 1.55% to 0.59% over the ten years prior to November of 2022.7

Anyone who is considering a P2P lending site should be aware of the charges on transactions. Each site earns money in a different way however, fees and commissions could be due at the expense of the borrower, the lender borrower, or both. Like banks, the sites might charge loan origination fees, late fees, and bounced-payment fees.
Is peer-to-peer lending (P2P) safe?

Peer-to peer lending is more risky than a savings account or certificate of deposit, but the rates of interest are typically more expensive. This is because people who invest in a peer-to-peer lending website assume the majority of the risk, which is normally taken on by banks and any other institutions of finance.
What is the size of Peer-to-Peer (P2P) loans?

The market for peer-to peer lending was worth $83.79 billion in 2021 according to data from Precedence Research. This figure is projected to rise to $705.81 billion in 2030.8
How can you make an investment in peer-to peer lending?

The simplest way to invest in peer-to-peer lending is to open an account on a peer-to-peer lending website and start lending money to the borrowers. These websites typically permit the lender to select the characteristics of their borrowers and allow them to choose between high risk/high return or lower returns. Additionally some P2P lending sites are public businesses, which means that one can also buy their shares.
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