Understanding Peer-to-Peer Lending (2024)

Peer-to-peer lending is an online lending service where independent investors fund loans for individuals looking to borrow money. In return, the investors themselves collect the interest fees a borrower would typically pay back to a bank or financial institution. Most P2P loans usually don’t require any collateral. The entirety of a borrower’s loan may be funded by a single investor or by a group of different investors pitching in smaller amounts.

By cutting out the middleman, a P2P lending service gives investors a chance to receive a bigger return on their initial investment. But at the same time, those investors take on the risk of loaning money to a customer or business that may not repay their loan as promised. P2P lending offers both secured and unsecured loans — however, most of the loans are unsecured personal loans.

Peer-to-peer lending basically works by connecting online borrowers who need funds to investors who can issue loans, even though they never directly interact. You can compare it to how eharmony does the legwork for you to find your perfect match, without the actual talking and dating stuff.

From determining loan eligibility, setting the interest rates and fees, and collecting payments, the platforms handle it all. Altogether, P2P lending is a fairly straightforward process. Let’s see what it looks like for both the borrower and the investor.

Peer-to-Peer lending for borrowers

Here’s what the process will usually look like if you’re a borrower who wants to utilize P2P lending:

1. Compare P2P platforms and lending guidelines. (Marketplaces can have different fees, interest rates, minimum credit score requirements, max loan amounts, etc.)
2. Apply to the platform that you like by filling out its application. This may require a credit check, but some sites allow you to apply for a pre-approval. (Remember, this is a soft inquiry and doesn’t affect your credit score.)
3. If approved, calculate your monthly payment based on your given interest rate and terms. Then determine if your payments are within your budget.
4. Wait for investors to review your listing. Depending on investor interest, your loan could be fully funded within the same day or until your listing expires.
5. When approved, you’ll receive the funds and start making scheduled loan payments.

Peer-to-Peer lending for investors

Now let’s walk through the process for an investor:

1. 1. Compare P2P platforms and their investor guidelines. (Look out for service fees, as these will ultimately cut into your investment’s return.)
   2. Once you choose a site, create an account.
   3. Examine loan options and assess risk.
   4. Choose an investment and allocate funds. Some investors choose to partially fund loans.
   5. Log in to the site to check your earnings and your investments’ progress. Then, you can either reinvest any profits made or withdraw them.

P2P loans initially started out as personal unsecured loans that you could borrow for any legal purpose and didn’t have to pledge collateral. Personal loans are still the most common P2P loans, and they’re also the most flexible. However, they aren’t the only ones. Let’s take a look at the 3 main types.

Peer-to-peer personal loan lending

P2P personal loans can be used to cover things such as medical bills, car purchases, home improvements, vacations, other large purchases, or debt consolidation. They act the same as a personal loan from a traditional bank or financial institution, except, of course, it’s funded by individual investors instead.

Peer-to-peer business loan lending

Small or new business owners may use P2P loans to grow their businesses and increase their odds of getting funds. They may use P2P funds for marketing, creating new products, or payroll. Business borrowers have an audience of multiple lenders on these P2P sites, which can be very appealing.

Peer-to-peer student or educational loan lending

P2P student loans are usually given as a lump-sum loan to give the borrower discretion on how to break up the money for school-related expenses. Although it’s best to use federal student aid options before considering other loans, P2P lending platforms can offer competitive rates for student loans as well.

P2P Lending State Restrictions

P2P loan offerings can be limited in some places, like these restrictions in Iowa. Always explore any limitations before making a commitment.

There are several online marketplaces that offer P2P loans. Once a borrower has identified the type of P2P loan they want to apply for, they’ll need to choose a lending site. Then, once their application is approved, they’ll need to review the loan terms and interest rate that they’re offered.

If the borrower is content with the terms, they can submit their loan listing to the platform and wait for investors to fund it. This is usually when a hard credit check will happen. Once the P2P loan is funded, the funds will be deposited into the borrower’s bank account, and they’ll need to keep up with the agreed-upon scheduled payments.

Popular P2P lenders

The P2P lending industry has become increasingly popular. In 2022, the size of the P2P lending industry in the U.S. is nearly $938.6 million, according to data from IBISWorld. The list of P2P lending platforms is continually growing, but these 6 lenders currently represent some of the biggest names in the business:

• Upstart
• Prosper
• Peerform
• SoFi
• LendingClub
• Funding Circle (business lending)

Although these are popular sites, always be sure to research any lender on your radar, and look at reviews from reputable sources before applying for a loan. To borrow, you’re required to provide sensitive and personal information, so you’ll want to make sure you’re in good hands.

P2P lenders will check credit scores to qualify borrowers, and they’ll also consider the length and amount of a loan to help determine the interest rate. Qualifying credit scores may vary, but a credit score greater than 580 is generally required. As the same with other personal loans, the better your credit score, the better the loan term and interest rate will be.

P2P lending can be an option for those with lower credit scores since individual investors have more wiggle room in setting approval odds than traditional financial institutions. P2P lending applications tend to be standard, so have your financial information and ID ready when you go to apply.

With most financial products, there are usually pros and cons to consider and weigh, especially when it comes to borrowing money. Let’s look at some of the benefits for both the borrower and the investor when it comes to P2P lending, along with the disadvantages.

Pros

Cons

P2P lending can be an innovative way to borrow money, especially for those who struggle to qualify for traditional loans. But, it’s not the perfect borrowing option for every person. Consider these alternatives if you need to access funding but don’t believe P2P lending is the right fit for you:

• Personal loans: These loans can be used to help pay for unexpected expenses, and if you have a fair credit score, you’re bound to secure a fair rate.
• Credit cards: Credit cards can be great financial tools to help you establish credit history and earn rewards. However, the average credit card interest rate can be high, and it can also be an expensive way to finance bigger purchases over a long period of time.
• Home equity line of credit: Homeowners can consider a home equity line of credit (HELOC), which is a revolving financing tool that has the flexibility of a credit card or other type of loan, but with a lower interest rate.

You can also talk to your personal bank or credit union when looking to borrow funds. Your financial institution can view how often you make deposits and how much you have in your savings account, and, therefore, it may be more open to loaning you money.

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If you don’t have excellent credit, or maybe you want to cut out the middleman, P2P lending might be an option for you. But before you complete an application, you’ll always want to compare:

• Interest rates
• Fees
• Repayment terms
• Maximum loan amounts
• Timelines

Not all lenders or platforms are run the same way, so make sure you’ve done your research before applying for a loan through a P2P lender to ensure you’re making the best move for your finances!