What is peer-to-peer lending?

Peer-to-peer (P2P) lending offers a way for individual investors to lend to borrowers, and for borrowers to experience a quicker application and approval process with potentially less stringent lending requirements. When you’re approved for a loan on a peer-to-peer loan marketplace, the funds may come from an individual, but the transaction is securely facilitated by the online platform. 

In the true definition of peer-to-peer lending, transactions occur without involvement from a bank, credit union, or online lender. Instead, the P2P loan marketplace acts as an intermediary, evaluating the borrower and handling the secure transfer of the funds. But in recent years, many lenders that once connected borrowers with individual investors, such as LendingClub and Upstart, began working with financial institutions or accredited investors primarily or instead. 

How P2P lending works

Most P2P loans are unsecured personal loans offered by investors through a P2P loan platform, but P2P lending also refers to loans made to small businesses. The Federal Deposit Insurance Corporation (FDIC) notes that “marketplace lending” is the preferred term for these platforms, but some sources refer to marketplace lending and P2P lending synonymously.

It may be easier to qualify for a P2P loan than a traditional loan, and you may get a lower interest rate, especially if you have fair or bad credit. The P2P platform typically collects a fee, and borrowers repay individual lenders with interest. Investors who lend through P2P platforms can also earn solid returns while helping another human, but there are risks. Here’s what you need to know.

The process may vary depending on the platform, but here’s what you can generally expect from a peer-to-peer lending platform that connects borrowers with individual investors:

1. The borrower applies online for a loan from a P2P lending platform, which typically requires creating an online account and authorizing a credit check. Borrowers can often get a rate estimate with no credit score impact prior to formally applying.
2. The P2P lending platform reviews the applicant’s application and financial information to assess risk and assign an appropriate interest rate. At this point, the lender will conduct a hard pull on the applicant’s credit profile, which could ding their score.
3. Once the borrower is approved for a loan, they’re given multiple term options to choose from and asked to sign their loan documents to accept the offer.
4. At some point after the borrower is approved, individuals are given the opportunity to invest in the loan. For example, Prosper allows individuals to invest in “notes,” or shares of the loan amount once the borrower has accepted the loan offer.
5. The borrower begins making monthly payments of principal and interest on the loan, and the money is distributed to contributing investors, minus any fees obtained by the platform.

Pros and cons of P2P lending

P2P lending platforms

Prosper is the only remaining true P2P marketplace in the peer-to-peer lending space that connects borrowers with individual investors for some loans. LendingClub notes are no longer available to investors, and Upstart only works with accredited investors.

Some Prosper loan features for borrowers to consider include:

• APR: 8.99% to 35.99% 
• Terms: 2 to 5 years
• Loan amounts: $2,000 to $50,000
• Funding time: As soon as the next business day

Prosper allows you to check your rate without hurting your credit — just note that rates you prequalify for are not offers of credit. You’ll need to formally apply to see your final rate and terms available to you (at which point Prosper will conduct a hard pull, which could ding your score). And you can use a Prosper personal loan for a variety of purposes, including debt consolidation and home improvement. The platform has excellent customer service reviews on Trustpilot as well. If you apply for a loan with Prosper, the funding may come from an individual who has chosen to invest in you.

Investors may enjoy the following benefits when investing with Prosper:

• The opportunity to invest in a portfolio of notes starting at $25
• Monthly passive income from loan payments
• Auto-investment opportunities with average historical returns of 5.5% (as of March 31, 2024)
• Cash balance in investment account is FDIC-insured (these are monies that are NOT actively invested in notes)

P2P marketplace

The global peer-to-peer (P2P) lending market was $188.1 billion in 2023, according to the International Market Analysis Research and Consulting Group, with most of the market working through a traditional lending model. What that means is that much P2P lending looks like regular lending, while marketplaces that connect investors to borrowers directly were on the decline.

How to invest in P2P lending

To invest in P2P loans, you’ll need to open an account with Prosper or another P2P lender. If you’re an accredited investor and are interested in investing with Upstart, you can reach out to [email protected].

After creating an account with Prosper, follow these steps:

1. Choose your investments: Prosper acknowledges that investing in a wide variety of notes, which are portions of individual loans, typically produces the best results. You can invest a minimum of $25. Each note is classified by risk level, and you can use an auto-invest tool to build your portfolio. You shouldn’t commit more money than you can afford to lose, especially if you invest in a high-risk/high-return portfolio.
2. Originate the loan: As soon as enough investors commit to funding the loan and Prosper completes necessary verifications of the borrower’s information, the loan is originated. Once this happens, the money is no longer FDIC-insured and there is a risk of loss.
3. Receive monthly income: Borrowers are required to make fixed monthly payments for two to five years. Each investor in the loan receives a portion of principal and interest based on their initial investment deposited directly into their Prosper account. If a borrower misses a payment, each investor also gets a share of the late fee. You can withdraw funds from your Prosper account or reinvest them at any time.

FAQ

Is it safe to use peer-to-peer lending?

Borrowers’ financial information is protected by the P2P lending platform, so applying for a P2P loan is safe. However, it’s always a good idea to compare rates and terms with traditional lenders. Investors in P2P lending risk loss if borrowers default, but investing in a diverse portfolio can reduce that risk.

How do I get a peer-to-peer loan?

Most peer-to-peer lenders no longer work with individual investors and instead pair borrowers with financial institutions. You may be able to get a peer-to-peer loan if you apply for a personal loan from Prosper, but not all borrowers will receive their loan funds from individuals.

What is P2P?

P2P is an acronym for peer-to-peer lending. When you take out a true peer-to-peer loan, you’re borrowing from an individual rather than a bank.