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What is Peer-to-Peer lending?

Understanding P2P Lending

History of Peer-to-Peer (P2P) Lending

Special Beacons

Peer-to-Peer Lending Q&As

Personal Loans, Loans

What is Peer-toPeer (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-toPeer (P2P) Loans?

Peer-to peer (P2P) lending allows individuals to receive loans directly from other people eliminating the financial institution as a middleman. Websites that facilitate P2P lending have greatly grown in popularity as an alternative method of financing.

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

Important Takeaways

Peer-to-peer (P2P) borrowing is type of financial technology that lets people loan or take money from one another, without having to go through the bank.

P2P lending sites allow borrowers to connect directly with investors. The site determines the rates and conditions and facilitates the transactions.

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

P2P borrowers seek an alternative to traditional banks, or the possibility of a lower interest.

In the case of P2P loans, default rate loans are much more than traditional finance.

Understanding Peer-to-Peer Lending

P2P loan websites link borrowers to lenders. Each site sets rates and terms, and facilitates the transaction. Most sites have a wide range of interest rates based on the creditworthiness of the person applying.

The investor first opens an account with the site and then deposits money that will be used to fund loans. The loan applicant posts an account with a financial profile. The profile has been assigned risk class that decides on 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 cut their requests into pieces and take multiple offers.) The money transfer and monthly payments are processed through the platform. The process can be completely automated, and lenders as well as the borrowers are able to negotiate.

Certain websites specialize in specific types of borrowers. StreetShares for instance is specifically 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 lending system was seen as offering credit to those who were rejected by traditional banks or the ability to combine student loan debt with an interest rate that was more attractive.

In recent times however, P2P lending sites have expanded their reach. The majority of them target customers who are looking to pay off credit card debt at an interest rate that is lower. Home improvement loans as well as auto finance are also offered at P2P lending sites.

The rates offered to applicants who have good credit scores are typically less than similar banks, but rates for those with poor credit records may go much higher. LendingTree.com, for example, listed personal loan rates from 5.99 percent 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 on 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 on their cash at a rate that exceeds the rates offered by traditional saving accounts, or certificates of deposits (CDs).

Certain P2P sites permit lenders to begin with a balance of as little as $25.

Special Beacons

Anyone who wants to lend money via a P2P lending site must be aware of the possibility that their borrowers will default on their loans, just as conventional banks do. Research of P2P lenders has revealed that defaults are more frequent than those faced by conventional financial institutions with some more than 10%.6

The Index of the S&P/Experian Composite index for defaults across all kinds of loans for U.S. borrowers has fallen from about 1.55 percent to 0.59% over the ten years before November of 2022.7

Any consumer or investor looking at a P2P lending website should also check the fees for transactions. Every site makes money differently, but fees and commissions could be paid at the expense of the borrower, the lender borrower or both. Similar to banks, sites can charge loan origination charges, late fees and bounced-payment fees.

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

Peer-to-peer lending is riskier than an account for savings or a certificate of deposit, however the interest rates are often much higher. This is because people that invest on a peer-to-peer lending site take on the majority of the risk. This is usually taken on by banks and any other institutions of finance.

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

The global peer-to-peer lending market was worth $83.79 billion as of 2021, according to data from Precedence Research. The market is expected to reach $705.81 billion by 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 create an account on a P2P lending site and then begin lending money to customers. The majority of these sites allow the lender to choose the profile of their borrowers, so they can choose between high risk/high return or more modest returns. Alternatively some P2P lending websites are public businesses, which means that one can also buy their shares.