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Guide to Peer-to-Peer (P2P) Lending

Guide to Peer-to-Peer (P2P) Lending
Jason Steele
Jason SteeleUpdated January 24, 2023
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With peer-to-peer lending, borrowers can get loans from investors instead of banks. Although it may sound unusual, peer-to-peer (P2P) lending is popular around the world. The global peer-to-peer lending market was worth $83.79 billion in 2021 and is projected to reach $705.81 billion by 2031, according to Precedence Research.Here’s how P2P lending works, the pros and cons, and how to know if it might be right for you.

What is Peer-to-Peer Lending?

Peer-to-peer lending does not involve traditional financial institutions like banks or credit unions. Instead, borrowers work with a private lender, which might be individual investors or businesses, to get a loan. P2P lending is done through an online peer-to-peer lending platform. Borrowers may benefit from P2P lending. For one thing, the qualifications for peer-to-peer personal loans are typically easier to meet than the personal loan requirements of traditional lenders. However, there are risks involved. And P2P lenders can be challenging to find.

P2P Lending Uses

Many P2P platforms offer unsecured personal loans, and these peer-to-peer loans may be used for a variety of purposes. For example, you could use personal loans to pay down credit card debt or to fund major home repairs. 

How Does Peer-to-Peer Lending Work?

If you want to try peer-to-peer lending, the first step is to choose a P2P lending platform. Be aware that peer-to-peer platforms often charge fees. Examples of fees could include a loan origination fee or a late fee if you miss a payment. Next, you’ll fill out an application on the P2P platform. There may be a credit check involved, so it’s wise to know your credit score and how to read a credit report beforehand to make sure everything in your report is accurate. If you are approved for a loan, the platform will let you know what your interest rate will be. If your credit is good, you may qualify for a competitive rate, but those with poor credit may pay much higher rates.Lenders will then review your loan. If one or more investors decide to fund it, the money will be electronically transferred to you. You could receive your funds within one day. After that, you will begin repaying the loan monthly. 

Can You Get a Personal Loan From an Individual?

It is possible to get a personal loan from an individual investor through peer-to-peer lending. Investors in P2P lending can be individuals or companies. Sometimes your loan may be funded by several individuals.

Is P2P Lending Legal?

Peer-to-peer lending is legal, but it does come with some risks. As a borrower, while P2P platforms strive to protect your personal and financial information, it is possible that a hack could happen at some point. And, of course, you will want to work with a reputable peer-to-peer lender.There is risk for P2P lenders as well. For instance, it’s important for peer-to-peer lenders to understand that these investments are not FDIC insured — which means the funds are not insured by the federal government the way they are with most traditional banks. If the borrower stops making payments on the loan, lenders might not get their money back. And the default rates for peer-to-peer loans are much higher than the rates of default on a personal loan from more traditional lenders. 

What Is an Example of Peer-to-Peer Lending?

One example of a peer-to-peer lending platform is Prosper. Each P2P platform has its own criteria, rating scales, and fees.Like most unsecured personal loans, peer-to-peer loans can be used for a variety of purposes. This includes debt consolidation, home improvement, medical bills, and car repair. 

Peer-to-Peer Lending vs Bank Loans

The main difference between peer-to-peer lending and bank loans is the way the loans are funded. With peer-to-peer lending, the money comes from an individual or group of individuals. With a bank loan, the money comes from a bank, credit union, or other financial institution. Banks often have stricter qualification standards for loans and take longer to fund loans once they’re approved. Banks also may require you to apply in person. Peer-to-peer loan applications are done online.It’s worth noting that there are plenty of online personal loan options borrowers can explore. For instance, you can compare the top personal loans of 2023 to look for one that suits your needs.

Advantages of Peer-to-Peer Lending

Peer-to-peer lending has some benefits for borrowers. For instance, those with a bad credit score might qualify for a loan. The funding process may also be faster than it is with a traditional bank or credit union.

Disadvantages of Peer-to-Peer Lending

There are notable disadvantages to P2P lending as well, including possible fees and higher interest rates.
P2P AdvantagesP2P Disadvantages
Borrowers with poor credit may be able to get a P2P loan.Borrowers could face a higher personal loan interest rate than they would with a traditional lender.
Once a loan is approved, the funding process can be faster than with a bank or credit union.There are often fees involved, including an origination fee.
Peer-to-peer lenders are becoming harder to find.

Finding P2P Lending Loans

Finding a peer-to-peer loan may take some work. There aren’t as many peer-to-peer lenders as there used to be. One that you may want to check out is Prosper, which launched in 2005, and was the first P2P lending marketplace in the country. It offers personal loans with fixed rates and terms from $2,000 to $50,000.

The Takeaway

Peer-to-peer loans might be a good option for borrowers who don’t want to work with a bank or those with a low credit score. However, peer-to-peer loans do come with risks. Plus, finding a peer-to-peer lender could be difficult since there are fewer of them. A borrowing alternative you may want to explore instead is a traditional personal loan. And Lantern can guide you through the process. It’s easy: Just fill out one simple form and in minutes, you’ll get offers from multiple lenders in our marketplace. With Lantern, you can find a personal loan with the best rates and terms for you.

Frequently Asked Questions

What is a peer-to-peer lending example?
What are the risks of peer-to-peer lending?
What are most P2P loans used for?
Photo credit: iStock/Charday Penn

About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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