What Is Peer-to-Peer Lending?

Written by Ashley FranklinReviewed by Nathan Brown, CFP®Updated: 13th Apr 2022
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Have you ever heard of peer-to-peer lending? If not, don’t worry – you’re not alone. This relatively new concept is often misunderstood, but it’s actually a very simple idea.

In short, peer-to-peer lending is a way for people to borrow and lend money without going through a bank or other financial institution.

If you’re still scratching your head, we’ll break it down for you in this blog post. Keep reading to learn more about peer-to-peer lending, how it works, and why it’s become so popular in recent years.

Who knows – maybe you’ll even decide that peer-to-peer lending is right for you!

What Is Peer-to-Peer Lending?

In the past, if you wanted to borrow money, you had to go through a traditional lender like a bank, credit union, or other finance company. And if you wanted to lend money, your only option was to invest in stocks, bonds, or other securities.

Peer-to-peer lending (also known as P2P lending) changes all that. With P2P lending, individuals can borrow and lend money without using a financial institution as a middleman.

In other words, it’s a way for everyday people to connect and lend money to each other. You can do this through websites or apps that facilitate peer-to-peer lending, like Lending Club and Prosper.

How Does Peer-to-Peer Lending Work?

So how does P2P lending work in practice? Let’s take a look at an example.

Say you need to borrow $1,000 for a new car. Of course, you could go to a bank and apply for a loan, but the process would likely be slow, and you might not get the best interest rate.

Alternatively, you could go to a site like Lending Club and borrow money from another individual. You would list the amount you want to borrow and the interest rate you’re willing to pay, and then people who are looking to invest in loans can choose to fund your loan.

If your loan is funded, you’ll receive the money you need, and you’ll be responsible for repaying it with interest.

What Can I Use a Peer-to-Peer Loan for?

One of the great things about P2P lending is that it’s not just for emergencies. You can use a peer-to-peer loan for pretty much anything, including:

The possibilities are endless! You’ll never have to worry about what you’re going to do with a peer-to-peer loan – it’s a great option for anything and everything.

What Fees Do P2P Lenders Charge?

When you take out a loan from a bank, there are a lot of fees involved. But with peer-to-peer lending, things are different.

Most P2P lenders will charge an origination fee, usually around 1-8% of the total loan amount. This fee goes towards the cost of processing and funding your loan.

You might also have to pay a service fee, which is a small monthly charge that covers the maintenance of your account. Payment fees are also standard with P2P loans – these are typically charged if you make a late payment or if you need to send in a physical check instead of making an electronic payment.

Finally, some lenders will charge a prepayment fee if you decide to pay off your loan early. This is usually around 1-5% of the principal.

>> More: Requirements to Get a Personal Loan

How Does It Work If I Want to Lend Money?

If you’re interested in lending money through P2P lending, the process is slightly different.

First, you’ll need to open an account with a P2P lender. Then, you’ll need to deposit some money into your account. This money will be used to fund loans that the lender issues.

Once you have money in your account, you can start lending it out. Most P2P lenders will allow you to choose the loans you want to fund, or you can let them choose for you.

You’ll earn interest on the loans you fund, and once the borrowers repay their loans, you’ll get your original investment back plus interest.

It’s a great way to make a little extra money while helping others out!

Pros and Cons of Peer-to-Peer Lending

There are many reasons why you might want to consider peer-to-peer lending. However, it’s essential to be aware of the pros and cons before deciding if it’s right for you.

Here are some of the pros of peer-to-peer lending:

Pros:

  • You can get a loan quickly and easily
  • There are typically low fees
  • You can use the money for anything you want

Cons:

  • You might not get the best interest rate
  • There’s a risk that you won’t be able to repay your loan

Is Peer-to-Peer Lending Safe?

Peer-to-peer lending is a relatively new industry, so it’s natural to wonder if it’s safe.

Here’s the thing: because peer-to-peer lending platforms are online, they’re subject to the same risks as any other online service. For example, there’s always a risk that your personal information could be hacked, or a cyberattack could take the platform down.

Peer-to-peer lending platforms are very secure. They use the same security measures as other online financial institutions, and they’re constantly working to improve their security protocols.

While there’s always a risk when doing anything online, peer-to-peer lending is generally a safe way to borrow and lend money.

Where Can I Get a Peer-to-Peer Loan?

If you’re interested in taking out a peer-to-peer loan, there are a few different places you can go.

Several online platforms offer peer-to-peer loans, including Lending Club, Prosper, and Kabbage.

These institutions are all reputable and have a good track record. So, if you’re interested in taking out a peer-to-peer loan, visit one of these websites and apply for a loan.

Peer-to-Peer Loans vs. Bank Loans:

Which one is right for you?

Now that you know a little bit more about peer-to-peer loans, you might be wondering if they’re suitable for you.

The truth is there’s no one-size-fits-all answer to this question. It depends on your financial situation and what you need the loan for.

Here’s a quick breakdown of the main differences between peer-to-peer and bank loans.

Peer-to-Peer Loans:

  • Can be funded quickly
  • Typically have low fees
  • Can be used for anything

Bank Loans:

  • Can take longer to get approved
  • Require a good credit score
  • Have strict restrictions on how they can be used
  • Income and employment verification needed

>> More: Should You Get an Online or In-Person Loan?

Online Loans vs. Peer-to-Peer Loans

Online loans are different from p2p loans in a few key ways. Online loans are typically issued by traditional financial institutions, such as banks or credit unions. Peer-to-peer loans, on the other hand, are funded by individual investors.

Another difference is that online loans usually have to be repaid within a set period, while peer-to-peer loans can be repaid over a longer period of time.

Finally, online loans typically have much higher interest rates than peer-to-peer loans.

If you’re thinking about taking out a loan, it’s important to compare the different options available to you and decide which one is best for your needs.

>> More: Compare the Best Personal Loans

Bottom Line: What Is a Peer-to-Peer Loan?

So, what is a peer-to-peer loan? In short, it’s a way to borrow and lend money from everyday people.

Peer-to-peer loans are typically quick and easy to get approved for, and they come with low fees. They can be used for anything you want, and you can repay them over a longer period of time.

Peer-to-peer loans are a great option if you’re looking for a quick and easy way to get a loan. Just be sure to compare the different options available to you and decide which one is best for your needs.

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Ashley Franklin
Ashley Franklin

Ashley Franklin is a professional writer and financial literacy expert. Ashley double-majored in Computer Science and Communications, and she brings her talents to the forefront with writing about personal finance and investing. Having worked with renowned international websites and publications, Ashley has found that there’s no one-size-fits-all solution to financial management. That’s why her articles are all about finding what works for you.