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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

Personal Loans, Loans

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

By Julia Kagan

Updated 20th December 20, 2022

Reviewed by Thomas J. Catalano

Facts verified by Amanda Bellucco-Chatham

What is Peer-toPeer (P2P) Lending?

Peer to peer (P2P) lending enables individuals to obtain loans directly from others eliminating the financial institution as a middleman. Websites that allow P2P lending have dramatically grown in popularity as a method of financing.

P2P lending is also referred to by the name of «social lending» or «crowd lending.» It has been in existence since however, the list of competitors already includes Prosper, Lending Club, Upstart, and StreetShares.

The most important takeaways

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

P2P lending websites connect borrowers directly to investors. The website sets rates and conditions, and allows the transactions.

P2P lenders are investors who are looking to earn 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 an alternative to traditional banks or an interest rate that is lower.

In the case of P2P loans, default rate loans are significantly higher than the default rates for traditional finance.

Understanding Peer-to-Peer Lending

P2P loan websites link borrowers to lenders. Each site sets rates and the terms and allows the loan. Most sites have a wide variety of interest rates based on the creditworthiness of the person who is applying.

First, an investor opens an account with the website and then deposits money to be dispersed in loans. The loan applicant posts an financial profile which is assigned a risk classification that decides on the interest rate the applicant will pay. The loan applicant has the option of reviewing proposals and decide to decide to accept one. (Some applicants cut their requests into chunks and accept 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 customers can decide to haggle.

Some sites specialize in particular kinds of borrowers. StreetShares, for example, is specifically designed for small businesses.1 And Lending Club has a «Patient Solutions» category that connects physicians who provide financing programs with prospective patients.2

History of Peer to Peer (P2P) Lending

In the beginning, the P2P loan system was viewed as offering credit access to people who were rejected by traditional institutions, or as a way for consolidating student loan debt at lower interest rates.

In recent years however, P2P lending sites have expanded their reach. The majority of them target customers who want to pay off credit card debt with a lower interest rate. Home improvement loans or auto loans are also available through P2P lending sites.

The rates offered to applicants with good credit are often less than similar bank rates, whereas rates for those with poor credit histories could be higher. LendingTree.com For instance, offered personal loan rates from 5.99% to 35.99% as of Dec. 15, 2022.3 Peerform posted loan rates in a range of 5.99% up to 29.99%.4 The average credit card interest rate was 19.59 percent as of December. 14, 2022 according to CreditCards.com.5

for lenders P2P loaning is an effective means to earn interest on their cash at a rate higher than those offered by conventional saving accounts, or certificates of deposits (CDs).

Some P2P sites allow lenders to start with an account with a balance as low as $25.

Special Beacons

Individuals who want to lend money through P2P lending sites must be aware of the possibility that their borrowers could default on their loans like traditional banks are prone to do. The research of P2P lending platforms has indicated that defaults are far more frequent than those faced by banks that are traditional, sometimes more than 10%.6

The average of S&P/Experian’s composite of default rate across all types of lending to 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. Every website makes money in different ways However, commissions and fees may be due either to the lending institution, borrower or both. As banks do, websites 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 but the rates of interest are typically more expensive. This is because people investing in peer-to-peer lending site take on the majority of the risk, which is typically assumed by banks or other financial institutions.

How big is Peer-to-Peer (P2P) lending?

The global peer-to-peer lending market was worth $83.79 billion in 2021 according to data from Precedence Research. The market is expected to reach $705.81 billion by 2030.8

What are the best ways to make an investment in peer-to peer lending?

The easiest method of investing in peer-to peer lending is to open an account with a P2P lending site and begin lending money to borrowers. These websites typically permit the lender to select the type of borrower they want to lend to which means they can pick between high risk/high returns and more modest returns. Alternatively some P2P lending sites are public companies, so one can also invest in them by purchasing their shares.