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

Loans Personal Lending

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

Peer-to peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. Websites that facilitate P2P lending have dramatically grown in popularity as a method of financing.

P2P lending is also known as "social lending" or "crowd lending." It has only been available since however, the list of rivals already includes Prosper, Lending Club, Upstart and StreetShares.
The most important takeaways

Peer-to peer (P2P) borrowing is kind of technology in finance that lets people loan or borrow money from one another, without having to go through banks.
P2P lending websites allow borrowers to connect directly with investors. The site sets the rates and conditions, and allows the transactions.
P2P lenders are investors who are looking to earn more money from their cash savings than what they could get from a savings account at a bank or a certificate of deposit.
P2P borrowers seek alternatives 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 loan websites link borrowers with lenders. Each website sets the rates and conditions and enables the transaction. The majority of websites offer a broad variety of interest rates depending on the creditworthiness the applicant.

First, an investor opens an account with the site and then deposits money to be dispersed in loans. The loan applicant submits a financial profile that has been assigned risk classification that determines the interest rate the borrower will be charged. The loan applicant has the option of reviewing the offers and choose to choose to accept one. (Some applicants split their requests into pieces and then accept several offers.) The money transfer as well as the monthly installments are managed by the platform. The process can be entirely automated, or lenders and borrowers can choose to haggle.

Certain websites specialize in specific kinds of borrowers. StreetShares, for example, is designed for small businesses.1 Additionally, Lending Club has a "Patient Solutions" category that connects physicians who provide financing programs to prospective patients.2
History of Peer to Peer (P2P) Lending

At first P2P lending was a popular option. P2P credit system was seen as offering credit access to those who might be rejected by conventional institutions or a way to combine student loan debt at lower interest rates.

In recent years but, P2P lending sites have increased their coverage. The majority of them target customers who want to pay off credit card debt with a lower interest rate. Home improvement loans and auto financing is also available on P2P lending websites.

The rates offered to applicants who have good credit scores are typically less than similar banks, but rates for applicants with sketchy credit records may go much higher. LendingTree.com For instance, listed personal loan rates of 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 on credit cards was 19.59% as of Dec. 14th, 2022, according to CreditCards.com.5

For lenders, P2P loans are a means to earn interest from their funds at rates higher than the rates offered by traditional bank savings or certificate of deposit (CDs).

Certain P2P sites let lenders begin with a that has a balance of just $25.
Special Considerations

Anyone who wants to lend money via a P2P lending site must be aware of the possibility that their borrowers could default on their loans like conventional banks do. Research on P2P loan platforms have indicated that defaults are much more common than those facing traditional financial institutions, with some in excess of 10%.6

In contrast, the S&P/Experian composite index of default rates across all kinds of loans for U.S. borrowers has fallen from 1.55 percent to 0.59% over the ten years preceding November of 2022.7

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

Peer-to-peer lending can be more risky than a savings account or the certificate of deposit but the interest rates are often more expensive. This is because people who invest in a peer-to-peer lending site take on the majority of the risk. This is usually assumed by banks or different financial institutions.
How big is this market of peer-to-peer (P2P) loans?

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

The simplest method of investing in peer-to peer lending is to open an account on a P2P lending website and start lending money to borrowers. These websites typically allow the lender to choose the characteristics of their borrowers and allow them to choose between high risk/high return or less risky returns. In addition there are many P2P lending sites are public firms, and one could also invest in them by purchasing their shares.
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