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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-toPeer (P2P) Loans? What is its definition and how it works

By Julia Kagan

Updated December 20, 2022

Reviewed by Thomas J. Catalano

Fact checked by Amanda Bellucco-Chatham.

What is Peer-toPeer (P2P) Lending?

Peer-to peer (P2P) lending allows people to get loans directly from others, cutting out the financial institution as the middleman. Websites that allow P2P lending have significantly grown in popularity as a method of financing.

P2P lending is also referred to also as «social lending» or «crowd lending.» It has only been available since However, the group of competitors already includes Prosper, Lending Club, Upstart and StreetShares.

The most important takeaways

Peer-to peer (P2P) loan is one form of technology for financial transactions that allows people to lend or borrow money from one another, without having to go through banks.

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

P2P lenders are investors who wish to receive more money from their cash savings than they would get from a bank savings account or a certificate of deposit.

P2P borrowers are looking for alternatives to traditional banks, or an interest rate that is lower.

The default rates for P2P loans are significantly higher than those in traditional finance.

Understanding Peer-to-Peer Lending

P2P lending websites connect borrowers directly with lenders. Each website sets the rates and the terms and allows the loan. Many websites have a wide range of interest rates dependent on the creditworthiness of the person who is applying.

First, an investor opens an account with the site and deposits a sum of funds to be distributed in loans. The loan applicant submits a financial profile that has been assigned risk classification that determines the interest rate the applicant will pay. The loan applicant is able to review offers and choose to accept one. (Some applicants split their requests into pieces and take multiple offers.) The money transfer and the monthly payments are handled through the platform. The process can be completely automated, while lenders and borrowers can choose to haggle.

Certain sites are specialized in certain types of borrowers. StreetShares, for example, is specifically designed for small businesses.1 Furthermore, Lending Club has a «Patient Solutions» category that links doctors who offer financing options with potential patients.2

History of Peer-to-Peer (P2P) Lending

In the beginning P2P lending was a popular option. P2P credit system was viewed as offering credit access to those who would be spurned by conventional institutions or an opportunity to combine student loan debt at a more favorable interest rate.

In recent years but, P2P lending sites have increased their reach. They are now targeting consumers who are looking to pay off credit card debt at a lower interest rate. Improvement loans and auto financing is also available on P2P lending websites.

Rates for those with good credit tend to be lower than comparable bank rates, while rates for those with poor credit scores could be higher. LendingTree.com, for example, offered personal loan rates ranging from 5.99 percent to 35.99 percent as of Dec. 15, 2022.3 Peerform posted loan rates in a range of 5.99 percent to 29.99%.4 The average credit card interest rate was 19.59 percent as of December. 14th, 2022 according to CreditCards.com.5

For lenders, P2P loans are a way to generate interest income for their money at a cost higher than the rates offered by traditional savings accounts or certificates of deposit (CDs).

Certain P2P sites allow lenders to start with an account balance of as little as $25.

Special Beacons

People who wish to lend money through 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 lending platforms has indicated that defaults are much more common than those facing conventional financial institutions with some exceeding 10%.6

The S&P/Experian composite index of default rates for all kinds of loans made for U.S. borrowers has fallen from about 1.55% to 0.59 percent in the ten years before November of 2022.7

Anyone looking at a P2P lending website should also check the fees on transactions. Each site earns money in a different way However, commissions and fees could be paid either to the lending institution, borrower, or both. Like banks, the sites can charge loan origination fees, late fees and bounced-payment fees.

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

Peer-to-peer lending is riskier than a savings account or certificate of deposit, however the rates of interest are typically much higher. This is because people who invest in a peer to peer lending website assume the majority of the risk, which is typically assumed by banks or other financial institutions.

What is the size of Peer-to-Peer (P2P) lending?

The global peer-to-peer lending market was worth $83.79 billion in 2021 according to Precedence Research. This figure is projected to reach $705.81 billion by 2030.8

How can you make an investment in peer-to peer lending?

The easiest method to invest in peer-to-peer lending is to open an account on a P2P lending site and then begin lending money to customers. These sites typically allow the lender to choose the profile 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 publicly traded businesses, which means that one can also buy their shares.

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