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What Is Peer-to-Peer Lending?

Understanding P2P Lending

The history of Peer-to-Peer (P2P) Lending

Special Beacons

Peer-to-Peer Lending Q&As

Personal Loans and Loans

What is Peer-to-Peer (P2P) Lending? What is its definition and how it works

By Julia Kagan

Updated 20th December, 2022

Written by Thomas J. Catalano

Fact checked by Amanda Bellucco-Chatham.

What Is Peer-to-Peer (P2P) Loans?

Peer to peer (P2P) lending permits individuals to obtain loans directly from other people, cutting out banks as a middleman. Websites that support P2P lending have significantly expanded their use as a 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 group of competitors already comprises Prosper, Lending Club, Upstart and StreetShares.

Key Takeaways

Peer to peer (P2P) lending is a form of financial technology that allows people to loan or take money from one another, without having to go through a bank.

P2P lending sites provide direct access to investors for borrowers. The site determines the rates and conditions and facilitates the transactions.

P2P lenders are individuals who want to get a better return on their savings in cash than they would get from a savings account at a bank or certificate of deposit.

P2P borrowers seek alternatives 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 to lenders. Each site determines the 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.

First, an investor opens an account on the site and then deposits money to be dispersed in loans. The loan applicant creates an financial profile which has been assigned risk category that decides on the interest rate the loan applicant has to pay. The loan applicant has the option of reviewing the offers and choose to decide to accept one. (Some applicants break up their requests into smaller chunks and then accept several offers.) The money transfer and the monthly installments are managed by the platform. The process is completely automated, while lenders and the borrowers are able to negotiate.

Certain websites specialize in specific kinds of borrowers. StreetShares for instance is specifically designed for small businesses.1 Furthermore, Lending Club has a “Patient Solutions” category that connects the doctors that offer financing programs with prospective patients.2

The history of Peer-to-Peer (P2P) Lending

At first the P2P credit system was seen as offering credit access to people who might be rejected by conventional institutions or an opportunity for consolidating student loan debt with lower interest rates.

In recent years however, P2P lending sites have expanded their reach. They are now targeting consumers who are looking to pay off credit card debt with low interest rates. Home improvement loans and auto financing is also available at P2P lending sites.

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

for lenders P2P loaning is an effective means to earn interest from their funds at rates which is higher than the rates offered by traditional bank savings or certificate of deposit (CDs).

Some P2P sites allow lenders to begin with a with a balance as low as $25.

Special Beacons

Individuals who want to lend money via P2P lending sites need to consider the possibility that their borrowers could default on their loans like conventional banks would. Research of P2P lenders has revealed that defaults are more frequent than the defaults faced by banks that are traditional, often more than 10%.6

In contrast, the Index of the S&P/Experian Composite index for defaults for all kinds of loans made for U.S. borrowers has fallen from about 1.55 percent to 0.59 percent over the 10 years preceding November of 2022.7

Anyone who is considering a P2P lending site must also look into the fees for transactions. Each site earns money in a different way, but fees and commissions may be charged either to the lending institution, the borrower or both. Similar to banks, sites might charge loan origination fees, late fees, and bounced-payment charges.

Is peer-to-peer lending (P2P) safe?

Peer-to-peer lending can be more risky than the savings account or the certificate of deposit however the interest rates are often much higher. This is because those investing in 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 figures from Precedence Research. The market is expected to rise to $705.81 billion by 2030.8

What are the best ways to invest in lending through peer-to-peer?

The easiest method of investing in peer-to peer lending is to create an account on a peer-to-peer lending website and start lending money to customers. These websites typically permit the lender to select the type of borrower they want to lend to and allow them to choose between high risk/high returns or less risky returns. Additionally, many P2P lending sites are publicly traded businesses, which means that one can also buy their stock.