Definition, how does it work, risks

  • Peer-to-peer lending is a popular alternative to traditional financing methods.
  • There are several peer-to-peer platforms to choose from, but not all of them allow individuals to lend money through them.
  • Borrowers and lenders are always subject to risks, such as defaults.
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Peer-to-peer (P2P) lending is the process of obtaining financing from other people, as opposed to a financial intermediary such as a bank or a credit union. If you’ve ever borrowed money from someone else, you’ve basically participated in P2P lending in its simplest form.

You can also participate in P2P loan as a lender, providing funds to loan seekers and getting return on investment. So whether you are a borrower or a potential lender, it is worth exploring how peer-to-peer lending works and surveying the most reputable platforms that offer this service.

Basic principles of loan between individuals

The modern P2P lending system was born in 2005 when Zopa was launched in the UK. Soon after, Prosper and LendingClub introduced this service to the United States, although LendingClub has since closed its P2P program.

Historically, if you wanted to borrow money, you had to go through a bank or a credit union. P2P lending takes conventional financial institutions out of the equation – hence the name peer-to-peer. Instead, an online platform connects an individual in need of money with other individuals and entities willing to lend it to them. In this sense, lenders are also investors. Although this is the basic model, some P2P platforms get loans from small banks and

credit unions


The P2P loan process can be more beneficial than the traditional loan. Some borrowers, especially those with poor credit scores or poor credit histories, may have difficulty getting approved for a loan through a bank. P2P markets are often viable alternatives, and they may even offer better rates compared to high interest credit cards or payday loans.

For their part, lenders could potentially generate higher interest income compared to the return on a checking or savings account. Similar to the traditional loan model, the borrower makes regular payments, which consist of a principal amount and interest. Interest charges are investors’ profit – the premium they earn for lending money to the borrower. However, only institutional investors and accredited investors are eligible to participate in certain P2P lending platforms, such as Peerform and Upstart.

How does the loan between individuals work?

P2P lending involves two parties: borrowers seeking finance and investors seeking to lend money at a profit. Typically, P2P markets offer fixed rate, fully amortizing personal loans, which means their interest rates stay the same for the life of the loan and the balance is paid off in equal, scheduled installments.

Here’s how it works from both points of view.

How P2P Loan Works for Lenders

  1. First, compare P2P platforms and their investor dashboards. Be aware of service charges, as these will ultimately reduce the return on your investment. Once you’ve found your favorite site, create an account.
  2. Browse the platform’s loan listings, which are often organized by some form of credit rating. For example, Prosper’s scoring system ranges from AA to HR, or lowest to highest estimated annual loss on average. In general, better credit scores mean more secure loans, but also lower potential returns.
  3. Select ads based on loan amount, risk, and potential return. Depending on the amount of your contribution, you may have to wait for other investors to complete the financing of the loan.
  4. Watch your income from time to time. The P2P lending platform will process loan payments and distributions.

How P2P Loan Works for Borrowers

  1. First, compare the sites and loan guidelines. Marketplaces may have set-up fees, interest rates, minimum credit scores, maximum loan amounts, etc.
  2. Apply on your preferred platform by completing their application. This may require a credit check, but some sites allow you to request pre-approval, which is an indirect request and does not affect your credit scores.
  3. If approved, calculate your monthly payment based on the interest rate and terms you offer. Determine if your payments are within your budget.
  4. Wait for investors to review your ad. Depending on investor interest, your loan could be fully allocated on the same day or until your registration expires. For example, Prosper ads are terminated after 14 days.
  5. Receive funds and start making scheduled loan payments. The time it takes to receive your funds also varies from platform to platform. It may take a day or several days for your funds to be deposited.

What are the biggest peer-to-peer lending platforms?

The P2p lending industry has become more and more popular. In 2019, the size of the P2P lending industry in the United States, measured in terms of revenue, was $ 1.45 billion, according to data compiled by IBISWorld. But, comparatively, it’s still only a fraction of the size of the ad

banking industry

, which was much higher at $ 928 billion.

However, the pandemic has stifled loans across the country, regardless of industry. Last year, peer-to-peer platforms saw a significant drop in revenue to $ 818.5 million, while commercial banking services fell to $ 836.1 billion.

The first two major US players were Prosper and LendingClub, both of which offer unsecured personal loans. Although LendingClub has moved away from P2P lending, additional platforms have since entered the market including Upstart, SoFi, and Peerform. Prosper alone has issued over $ 20 billion in loans since its founding, and Upstart is not far behind at $ 16.7 billion since 2012.

Despite the relative youth of today’s platforms, the P2P lending industry has a lot of potential. “The recent buzz around decentralized finance shows us the growth potential of peer-to-peer lending,” explains Johannes Larsson, CEO of, an online platform for comparing loans and other financial products.

“I expect it to not only become more popular in the future, but also to become the norm someday, as society slowly but steadily moves towards decentralization,” Larsson adds.

While there are a number of P2P lending platforms to explore, they are generally more accessible as a borrower than as an investor. For example, Upstart limits its loan program to qualified investors, which must meet certain financial criteria in terms of income, wealth or license.

Is the loan between individuals safe?

P2P lending platforms are regulated at state and federal levels. For example, P2P markets must hold the applicable licenses in the states in which they operate. And platforms that sell securities to the public must register with the Securities and Exchange Commission (SEC).

As with any investment, P2P loans come with risk, especially from the lender’s perspective. P2P lending platforms may have lower minimum credit thresholds than traditional banks, which would indicate a higher risk of default on some loans. Some platforms take this into account when assessing loan applicants and calculating credit risk scores. Lower rated loans can have higher rates of return, but they also carry more risk.

From a borrower’s perspective, you may still not be eligible for a loan. And, even if you do, your loan may not be funded if it doesn’t generate enough investor interest. Moreover, like traditional loans, P2P borrowers must always make their scheduled payments in full and on time. Otherwise, they risk defaulting on their loan and damaging their credit rating.

The financial report

Lending between individuals can be an attractive alternative to traditional financing and investment. People in need of funds can save money and get faster approval for personal loan from P2P lending platform. Likewise, investors could generate additional fixed income by financing loans.

That said, beware of the origination fees as a borrower and service fees as an investor. They can limit the attractiveness of P2P loan services. Also, keep in mind that you still need to qualify to participate in this type of market. Loan applicants are subject to a credit check, and individual investors must meet the platform’s criteria, which may have high qualifying standards.