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What is Peer-to Peer Lending?

Understanding P2P Lending

Peer-to peer (P2P) Lending

Special Beacons

Peer-to-Peer Lending Q&As

Loans Personal Lending

What is Peer-to-Peer (P2P) lending? The definition and the way it operates

By Julia Kagan

Updated December 20 20, 2022

Review by Thomas J. Catalano

Fact checked by Amanda Bellucco-Chatham

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

Peer-to peer (P2P) lending enables individuals to receive loans directly from others and eliminates the financial institution as the middleman. Websites that allow P2P lending have greatly increased their adoption as a method of financing.

P2P lending can also be referred to also as «social lending» or «crowd lending.» It’s been in existence since However, the group of competitors already includes Prosper, Lending Club, Upstart, and StreetShares.

The most important takeaways

Peer to peer (P2P) lending is a form of technology for financial transactions that allows people to lend or take money from one another without going through the bank.

P2P lending sites allow borrowers to connect directly with investors. The website sets rates and terms and enables the transactions.

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

P2P borrowers seek alternatives to traditional banks or the possibility of a lower interest.

For P2P, the default percentages for loans are more than traditional finance.

Understanding Peer-to-Peer Lending

P2P sites for lending connect consumers directly with lenders. Each website sets the rates and terms, and allows the loan. Many websites have a wide variety of interest rates depending on the creditworthiness the person applying.

First, an investor opens an account with the website and then deposits funds to be distributed in loans. The loan applicant submits a financial profile that is assigned a risk category that decides on the interest rate the borrower will be charged. The loan applicant is able to review the offers and choose to accept one. (Some applicants cut their requests into smaller chunks and take multiple offers.) The money transfer and the monthly installments are managed by the platform. The process can be completely automated, and lenders as well as borrowers can choose to haggle.

Some sites specialize in particular types of borrowers. StreetShares for instance is designed specifically 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

At first P2P lending was a popular option. P2P lending system was thought of as a way to provide credit access to people who would be spurned by conventional institutions or an opportunity to combine student loan debt at a more favorable interest rate.

In recent times, however, P2P lending sites have increased their reach. Most now target consumers who wish to settle credit card debt with a lower interest rate. Improvement loans and auto financing are also offered at P2P lending sites.

The rates for applicants 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, provided personal loan rates from 5.99% to 35.99 percent as of Dec. 15, 2022.3 Peerform posted loan rates in a range of 5.99 percent up 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 method to earn interest from their funds at rates higher than the rates offered by traditional savings accounts or certificates of deposit (CDs).

Some P2P sites let lenders begin with a balance of as little as $25.

Special Considerations

Individuals who want to lend money via a P2P lending site must be aware of the possibility that their customers will fail on their loans the same way that conventional banks would. Studies of P2P lenders has revealed that defaults are more frequent than the defaults faced by banks that are traditional, sometimes more than 10%.6

By comparison, 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 percent over the 10 years prior to November of 2022.7

Any consumer or investor considering a P2P lending site must also look into the fees for transactions. Every website makes money in different ways However, commissions and fees may be charged at the expense of the borrower, the lender borrower, or both. Like banks, the sites may 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 the certificate of deposit however the interest rates are often much higher. This is due to the fact that those investing in peer-to-peer lending website assume the majority of the risk, which is typically assumed by banks or different financial institutions.

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

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

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

Payday Loan Witrh Bad Credit or No credit The easiest method of investing in peer-to peer lending is to make an account on a P2P lending site and then begin lending money to customers. These sites typically allow the lender to choose the characteristics of their borrowers which means they can pick between high risk/high returns and less risky returns. Alternatively there are many P2P lending sites are public companies, so one can also invest in them by buying their shares.