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6 Confirmed Payday Loans Near Me 550 Techniques

What Is Peer-to-Peer Lending?

Understanding P2P Lending

Peer-to peer (P2P) Lending

Special Considerations

Peer-to-Peer Lending Q&As

Personal Loans and Lending

What is Peer-to-Peer (P2P) lending? What is its definition and how it works

By Julia Kagan

Updated 20th December, 2022

Review by Thomas J. Catalano

Facts checked by Amanda Bellucco-Chatham.

What Is Peer-to-Peer (P2P) Lending?

Peer-to-peer (P2P) lending allows individuals to obtain loans directly from other individuals eliminating banks as a middleman. Websites that facilitate P2P lending have greatly increased their adoption as a way of financing.

P2P lending can also be referred to by the name of “social lending” or “crowd lending.” It has only been around since 2005, but the crowd of competitors already comprises Prosper, Lending Club, Upstart, and StreetShares.

The most important takeaways

Peer to peer (P2P) borrowing is type of financial technology that allows people to loan or take funds from each other without going through banks.

P2P lending sites provide direct access to investors for borrowers. The website sets rates and conditions, and allows the transactions.

P2P lenders are individual investors who are looking to earn higher returns on their savings in cash that they would receive from a bank savings account or a certificate of deposit.

P2P borrowers are looking for alternatives to traditional banks, or an interest rate that is lower.

For P2P, the default percentages for loans are significantly higher than the default rates for traditional finance.

Understanding Peer-to-Peer Lending

P2P loan websites link borrowers to lenders. Each site determines the rates and the terms and allows the loan. The majority of websites offer a broad choice of interest rates that are depending on the creditworthiness the person who is applying.

First, an investor opens an account with the website and deposits money that will be used to fund loans. The loan applicant creates an account with a financial profile. The profile is assigned a risk classification that decides on the interest rate the borrower will be charged. The loan applicant is able to review the offers and choose to decide to accept one. (Some applicants cut their requests into smaller chunks and take multiple offers.) The money transfer as well as the monthly payments are processed through the platform. The process can be completely automated, or lenders and borrowers can choose to haggle.

Certain websites specialize in specific types of borrowers. StreetShares, for example, is designed specifically for small businesses.1 Additionally, Lending Club has a “Patient Solutions” category that links the doctors that offer financing programs with prospective patients.2

History of Peer-to-Peer (P2P) Lending

In the beginning, the P2P loan system was seen as a way to provide credit to those who would be spurned by traditional institutions, or as the ability for consolidating student loan debt with a more favorable interest rate.

In recent times, in recent years, P2P lending sites have increased their reach. The majority of them target customers who are looking to pay off credit card debt at an interest rate that is lower. Home improvement loans or auto loans are also available through P2P lending sites.

The rates offered to applicants with good credit tend to be lower than comparable banks, but the rates for those with less than stellar credit records may go much higher. LendingTree.com For instance, offered personal loan rates of 5.99% to 35.99 percent as of December. 15 2022.3 Peerform posted loan rates in a range of 5.99% up to 29.99%.4 The average interest rate for credit cards was 19.59 percent as of December. 14th, 2022 according to CreditCards.com.5

To lenders, P2P loans are a means to earn interest for their money at a cost which is higher than the rates offered by traditional bank savings or certificate of deposit (CDs).

Certain P2P sites allow lenders to start with an account with a balance as low as $25.

Special Beacons

People who wish to lend money through a P2P lending site must be aware of the possibility that their customers will fail on their loans like conventional banks do. Research on P2P loan platforms have shown that defaults are much more common than those facing traditional financial institutions, sometimes in excess of 10%.6

The Index of the S&P/Experian Composite index for defaults across all kinds of loans to U.S. borrowers has fallen from about 1.55% to 0.59 percent over the 10 years preceding November of 2022.7

Any consumer or investor considering a P2P lending site must also look into the fees for transactions. Each site earns money in a different way However, commissions and fees may be due to the lender, borrower, or both. Similar to banks, sites may charge loan origination fees, late fees, and bounced-payment fees.

Is peer-to-peer lending (P2P) safe?

Peer-to peer lending is more risky than an account for savings or a certificates of deposit however the interest rates are often much higher. This is because those who invest in a peer to peer lending website assume the majority of the risk, which is normally assumed by banks or different financial institutions.

What is the size of this market of 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. The market is expected to be $705.81 billion in 2030.8

What are the best ways to invest in peer-to-peer lending?

The most straightforward method to invest in peer-to-peer lending is to create an account on a peer-to-peer lending site and then begin lending money to the borrowers. These websites typically let the lender choose the characteristics of their borrowers, so they can choose between high risk/high return or less risky returns. Additionally some P2P lending websites are public businesses, which means that one can also invest in them by purchasing their shares.