Peer-to-Peer Lending (2024)

What Is Peer-to-Peer Lending?

Peer-to-Peer Lending (1) Peer-to-peer lending, also known as P2P lending or social lending, is the practice of packaging small amounts of money from different lenders to provide a loan to a borrower. With P2P lending, rates are usually lower than bank rates because there isn’t a middleman. Loan amounts range between $1,000 and $40,000.

P2P lenders can include:

  • Wealth advisors
  • Fixed-income funds
  • Alternative asset managers
  • Individuals

They view these kinds of loans as investments that pay a fixed interest rate. Lenders may pledge as little as $25 to many borrowers, which results in a portfolio of loans to help manage their risk.

How Does a Peer-to-Peer Loan Work?

Most peer-to-peer loans are unsecured personal loans that are transacted online through P2P lending platforms. These sites:

  • Collect and verify a borrower’s personal and financial information
  • Perform credit scoring and credit checking
  • Process monthly payments
  • Service loans

Be aware that peer-to-peer loans aren’t FDIC insured, putting both lenders and borrowers at risk. FDIC stands for federal deposit insurance corporation. It helps protect a person’s account and money at certain financial institutions, like a bank. If a bank institution is FDIC insured, it means a person’s account is covered up to $250,000.1 So, if the bank goes out of business, the person won’t lose their money.

It's a good idea to check the terms and conditions of a peer-to-peer loan. Generally, these types of loans don’t have prepayment penalties, so you can pay the loan back earlier. But there may be loan origination fees or closing costs that can add to the total cost.

What Is P2P Lending Used For?

Historically, most peer-to-peer lending sites make loans out to individuals instead of businesses. In recent years, however, this trend is changing. According to the Small Business Administration, P2P lending is growing with online lending platforms filling a niche market for small business capital.

Business owners use P2P loans for a wide range of reasons, including:

  • Purchasing equipment and tools
  • Debt consolidation
  • Cover training costs for employees
  • Expansion

Is Peer-to-Peer Lending Safe?

Peer-to-Peer Lending (2) Because peer-to-peer lending isn’t FDIC insured, there are risks for lenders and borrowers. Lenders may not make as much of a return as expected, especially if a borrower defaults on their loan. Doing due diligence and researching peer-to-peer lending companies and platforms can help you avoid potential issues.

1 Federal Deposit Insurance Corporation, “Insured or Not Insured?”

The Hartford shall not be liable for any damages in connection with the use of any information provided on this page. Please consult with your insurance agent/broker or insurance company to determine specific coverage needs as this information is intended to be educational in nature.

The information contained on this page should not be construed as specific legal, HR, financial, or insurance advice and is not a guarantee of coverage. In the event of a loss or claim, coverage determinations will be subject to the policy language, and any potential claim payment will be determined following a claim investigation.

How Does Peer-to-Peer Lending Work?

If you're looking to get a loan for your small business, P2P lending may be a good option. You can use an online P2P platform to match with a lender who can offer loans for your small business. Wondering how it works?


Peer-to-Peer Lending (3)

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Borrowers use a P2P platform to find lenders.

Peer-to-Peer Lending (4)

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The P2P platform verifies the borrowers personal and financial information and performs credit scoring.

Peer-to-Peer Lending (5)

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Borrowers apply for loans on the platform.

Peer-to-Peer Lending (6)

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Lenders select which loans fit their level of risk.

Peer-to-Peer Lending (7)

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Borrowers make monthly payments to lenders directly on the platform.

Peer-to-Peer Lending (8)

In addition to getting the right funding, you'll also want business insurance coverage for your company. To learn more, get a quote today.

Peer-to-Peer Lending (9)

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For more than 200 years businesses have trusted The Hartford. We can help you get the right coverage with an online quote.

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Peer-to-Peer Lending (2024)

FAQs

Are peer-to-peer lending safe? ›

P2P lending can be riskier than traditional lending. That's because there's a higher risk of default, so lenders are more likely to lose money.

What is the peer-to-peer lending system? ›

What is Peer-to-Peer (P2P) Lending? Peer-to-peer lending is a form of direct lending of money to individuals or businesses without an official financial institution participating as an intermediary in the deal. P2P lending is generally done through online platforms that match lenders with the potential borrowers.

Is peer-to-peer lending profitable? ›

You can potentially earn money as an investor in P2P lending. When you invest in P2P loans, you're essentially providing funds to borrowers in exchange for the promise of repayment with interest. The interest you earn on successful loans can generate returns.

Who is the biggest P2P lender? ›

LendingClub is a peer-to-peer—or marketplace—lender founded in 2007. As the largest online lending platform for personal loans, LendingClub has worked with over 3 million customers and funded more than $55 billion in loans.

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