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What is Peer-to Peer Lending?
Understanding P2P Lending
History of Peer-to-Peer (P2P) Lending
Peer-to-Peer Lending Q&As
Loans Personal Credit
What is Peer-toPeer (P2P) lending? The definition and the way it operates
By Julia Kagan
Updated 20th December 20, 2022
Review by Thomas J. Catalano
Facts checked by Amanda Bellucco-Chatham
What is Peer-toPeer (P2P) Loans?
Peer-to peer (P2P) lending allows individuals to receive loans directly from other people and eliminates banks as the middleman. Websites that allow P2P lending have dramatically grown in popularity as an alternative way of financing.
P2P lending is also known as “social lending” or “crowd lending.” It has been in existence since however, the list of competitors already includes Prosper, Lending Club, Upstart and StreetShares.
Peer to peer (P2P) lending is a type of financial technology that allows individuals to loan or borrow money from one another without going through banks.
P2P lending websites connect borrowers directly to investors. The site sets the rates and conditions and facilitates the transactions.
P2P lenders are investors who are looking to earn higher returns on their savings in cash than what they could get from a bank savings account or a certificate of deposit.
P2P lenders are seeking an alternative to traditional banks or the possibility of a lower interest.
In the case of P2P loans, default rate loans are more than traditional finance.
Understanding Peer-to-Peer Lending
P2P sites for lending connect consumers directly to lenders. Each site determines the rates and the terms and allows the loan. The majority of websites offer a broad range of interest rates dependent on the creditworthiness of the applicant.
First, an investor opens an account with the website and deposits money that will be used to fund loans. The loan applicant submits an account with a financial profile. The profile has been assigned risk classification which determines the rate of interest the loan applicant has to pay. The loan applicant can review proposals and decide 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 is completely automated, or lenders and customers can decide to haggle.
Certain sites are specialized in certain types of borrowers. StreetShares for instance is designed specifically for small businesses.1 Furthermore, Lending Club has a “Patient Solutions” category that connects the doctors that offer financing programs to prospective patients.2
The history of Peer-to-Peer (P2P) Lending
At first the P2P lending system was viewed as providing credit to those who were rejected by conventional institutions or an opportunity to combine student loan debt with lower interest rates.
In recent years in recent years, P2P lending sites have increased their coverage. They are now targeting consumers who wish to settle credit card debt at an interest rate that is lower. Home improvement loans as well as auto finance are also offered through P2P lending sites.
The rates offered to applicants with good credit tend to be less than similar banks, but the rates for those with less than stellar credit histories could be higher. LendingTree.com, for example, provided personal loan rates from 5.99% to 35.99% as of Dec. 15, 2022.3 Peerform posted loan rates with a range from 5.99 percent up to 29.99%.4 The average interest rate on credit cards was 19.59 percent as of December. 14, 2022 according to CreditCards.com.5
for lenders P2P lending is a method to earn interest from their funds at rates which is higher than those provided by traditional savings accounts or certificates of deposit (CDs).
Some P2P sites allow lenders to start with an account that has a balance of just $25.
Special Takes into Account
Individuals who want to lend money using P2P lending platforms must be aware of the possibility that their customers will fail on their loans, just as conventional banks do. Studies into P2P lenders has shown that defaults are far more frequent than those faced by banks that are traditional, sometimes in excess of 10%.6
By comparison, the S&P/Experian composite index of default rates for all types of lending to U.S. borrowers has fallen from about 1.55 percent to 0.59% over the ten years before November of 2022.7
Anyone considering a P2P lending site should be aware of the charges on transactions. Each site earns money in a different way, but fees and commissions can be due to the lender, the borrower or both. Like banks, the sites might charge loan origination charges, late fees and bounced-payment charges.
Is peer-to-peer lending (P2P) safe?
Peer-to peer lending is more risky than an account for savings or a the certificate of deposit however the interest rates are usually more expensive. This is because those who invest in a peer-to-peer lending site take on the majority of the risk. This is typically assumed by banks or any other institutions of finance.
How big is Peer-to-Peer (P2P) credit?
The market for peer-to-peer lending was valued at $83.79 billion in 2021 according to data from Precedence Research. This figure is projected to rise to $705.81 billion in 2030.8
How can you invest in lending through peer-to-peer?
The simplest method of investing in peer-to peer lending is to make an account with a P2P lending website and start lending money to the borrowers. These sites typically permit the lender to select the characteristics of their borrowers which means they can pick between high risk/high returns or less risky returns. Alternatively there are many P2P lending websites are public companies, so one can also invest in them by buying their stock.
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