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What Is Peer-to-Peer Lending?

Understanding P2P Lending

Peer-to peer (P2P) Lending

Special Takes into Account

Peer-to-Peer Lending Q&As

Loans Personal Loans

What is Peer-toPeer (P2P) Loans? Definition and How It Works

By Julia Kagan

Updated December 20 20, 2022

Review by Thomas J. Catalano

Fact checked by Amanda Bellucco-Chatham

What is Peer-toPeer (P2P) Loans?

Peer to peer (P2P) lending enables people to get loans directly from others eliminating the financial institution as a middleman. Websites that allow P2P lending have dramatically expanded their use as a different method of financing.

P2P lending can also be referred to as “social lending” or “crowd lending.” It’s only been around since 2005 however, the list of competitors already includes Prosper, Lending Club, Upstart, and StreetShares.

The most important takeaways

Peer-to-peer (P2P) lending is a type of technology for financial transactions that lets people lend or borrow funds from each other without having to go through a bank.

P2P lending websites connect borrowers directly to 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 what they could get from a bank savings account or certificate of deposit.

P2P lenders are seeking alternatives to traditional banks, or the possibility of a lower interest.

For P2P, the default percentages for loans are significantly higher than the default rates for traditional finance.

Understanding Peer-to-Peer Lending

P2P sites for lending connect consumers directly with lenders. Each website sets the rates and the terms and allows the transaction. The majority of websites offer a broad range of interest rates depending on the creditworthiness the person who is applying.

An investor creates an account with the site and deposits money to be dispersed in loans. The loan applicant posts an account with a financial profile. The profile will be assigned an risk classification which determines the rate of interest the borrower will be charged. The loan applicant can review offers and decide to accept one. (Some applicants cut their requests into chunks 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, and lenders as well as customers can decide to haggle.

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

History of Peer-to-Peer (P2P) Lending

At first the P2P loan system was viewed as providing credit to those who might be rejected by conventional institutions or the ability for consolidating student loan debt at lower interest rates.

In recent years, in recent years, P2P lending sites have increased their reach. The majority of them target customers who want to pay off credit card debt with low interest rates. The home improvement loans or auto loans are also offered through P2P lending sites.

The rates for applicants who have good credit scores are typically less than similar bank rates, whereas rates for those with poor credit scores could be higher. is an example. It listed personal loan rates of 5.99% to 35.99 percent as of Dec. 15, 2022.3 Peerform posted loan rates with a range from 5.99 percent up to 29.99%.4 The average interest rate on credit cards was 19.59 percent as of Dec. 14th, 2022 according to

For lenders, P2P loaning is an effective method to earn interest for their money at a cost which is higher than those provided by traditional saving accounts, or certificates of deposits (CDs).

Certain P2P sites allow lenders to begin with a that has a balance of just $25.

Special Considerations

Anyone who wants to lend money using P2P lending platforms must be aware of the possibility that their customers will fail on their loans, just as conventional banks do. Studies of P2P loan platforms have shown that defaults are far more frequent than the defaults faced by conventional financial institutions with some exceeding 10%.6

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

Any consumer or investor looking at a P2P lending website should also check the fees on transactions. Each site earns money in a different way, but fees and commissions can be charged to the lender, the 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 can be more risky than a savings account or certificates of deposit however the interest rates are often significantly higher. This is because those investing in peer-to -peer lending site take on the majority of the risk, which is typically the responsibility of banks or any other institutions of finance.

What is the size of this market of peer-to-peer (P2P) loans?

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

How do you invest in peer-to-peer lending?

The simplest method to invest in peer-to-peer lending is to create an account on a peer-to-peer lending site and begin 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 returns or less risky returns. Additionally, many P2P lending sites are publicly traded businesses, which means that one can also invest in them by purchasing their shares.


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