What is Peer-to Peer Lending?
Understanding P2P Lending
History of Peer-to-Peer (P2P) Lending
Special Beacons
Peer-to-Peer Lending Q&As

Loans Personal Credit

What Is Peer-to-Peer (P2P) lending? Definition and How It Works
By Julia Kagan
Updated December 20, 2022
Review by Thomas J. Catalano
Facts checked by Amanda Bellucco-Chatham.
What Is Peer-to-Peer (P2P) Lending?

Peer-to peer (P2P) lending permits people to get loans directly from other individuals and eliminates the financial institution as the middleman. Websites that facilitate P2P lending have significantly grown in popularity as an alternative method of financing.

P2P lending is also referred to as "social lending" or "crowd lending." It has been in existence since However, the group of competitors already comprises Prosper, Lending Club, Upstart and StreetShares.
The most important takeaways

Peer-to-peer (P2P) borrowing is type of financial technology that allows individuals to lend or borrow money from one another without going through the bank.
P2P lending sites allow borrowers to connect directly with investors. The website sets rates and conditions, and allows the transactions.
P2P lenders are individual investors who want to get more money from their savings in cash than they would get from a bank savings account or certificate of deposit.
P2P borrowers seek an alternative to traditional banks, or the possibility of a lower interest.
The default rates for P2P loans are much more than traditional finance.

Understanding Peer-to-Peer Lending

P2P lending websites connect borrowers directly with lenders. Each site sets rates and the terms and allows the loan. Most sites have a wide choice of interest rates that are depending on the creditworthiness the person who is applying.

The investor first opens an account with the site and deposits money that will be used to fund loans. The loan applicant posts an financial profile which will be assigned an risk category that determines the interest rate the applicant will pay. The loan applicant is able to review the offers and choose to choose to accept one. (Some applicants break up their requests into pieces and take multiple offers.) The money transfer as well as the monthly payments are handled through the platform. The process can be entirely automated, and lenders as well as the borrowers are able to negotiate.

Certain websites specialize in specific types of borrowers. StreetShares, for example, is designed specifically for small businesses.1 Furthermore, Lending Club has a "Patient Solutions" category that links the doctors that offer financing programs to prospective patients.2
History of Peer to Peer (P2P) Lending

At first P2P lending was a popular option. P2P loan system was seen as offering credit access to people who might be rejected by traditional banks or an opportunity for consolidating student loan debt at lower interest rates.

In recent years, however, P2P lending sites have extended their coverage. Most now target consumers who want to pay off credit card debt at a lower interest rate. The home improvement loans as well as auto finance are also offered on P2P lending websites.

The rates for applicants who have good credit scores are typically lower than comparable banks, but the rates for those with less than stellar credit records may go much higher. LendingTree.com is an example. It offered personal loan rates ranging from 5.99% to 35.99 percent as of December. 15 2022.3 Peerform posted loan rates at a range of 5.99% up to 29.99%.4 The average interest rate for credit cards was 19.59 percent as of Dec. 14, 2022 according to CreditCards.com.5

To lenders, P2P lending is a method to earn interest from their funds at rates which is higher than those offered by conventional bank savings or certificate of deposit (CDs).

Certain P2P sites let lenders begin with a with a balance as low as $25.
Special Takes into Account

Anyone who wants to lend money using P2P lending sites must be aware of the possibility that their borrowers will default on their loans, just as conventional banks would. Research into P2P loan platforms have shown that defaults are far more common than those facing conventional financial institutions with some in excess of 10%.6

By comparison, the average of S&P/Experian's composite of default rate for all kinds of loans to U.S. borrowers has fallen from about 1.55 percent to 0.59 percent in the ten years before November of 2022.7

Anyone who is considering a P2P lending site must also look into the fees on transactions. Every site makes money differently however, fees and commissions can be due at the expense of the borrower, the lender borrower or both. As banks do, websites may 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 the savings account or certificates of deposit but the interest rates are usually much higher. This is because those that invest on a peer to peer lending site assume most of the risk, which is usually assumed by banks or any other institutions of finance.
How big is the market for peer-to-peer (P2P) loans?

The market for peer-to peer lending was valued at $83.79 billion by 2021, according to data from Precedence Research. The market is expected to be $705.81 billion in 2030.8
What are the best ways to invest in lending through peer-to-peer?

The most straightforward method of investing in peer-to peer lending is to make an account on a P2P lending site and then begin lending money to borrowers. The majority of these sites allow the lender to choose the type of borrower they want to lend to and allow them to choose between high risk/high returns and lower returns. In addition there are many P2P lending websites are public firms, and one could also invest in them by buying their shares.
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