What Is Peer-to-Peer Lending?

You might come across peer-to-peer (P2P) lending if you need extra funds for an upcoming expense, like an unexpected medical bill, home improvement project or auto repair. You may also be looking for a way to consolidate debt. P2P lending is an alternative to borrowing from traditional banks and lenders, whether online or in branches, that connects borrowers to individual lenders, typically through an online platform.¹

Below, we’ll break down how P2P lending works, its benefits and drawbacks and what to consider before you get started — either as a borrower or lender.

What is peer-to-peer lending?

While traditional lending involves borrowing money from a bank, credit union or online lender, P2P lending is when you borrow money directly from other individuals without going through a bank or other financial institution.²

In most cases, the application and funding of P2P loans are made in an online lending platform that brings borrowers and lenders together. Just like traditional loans, P2P lending could be used to cover virtually any expense, such as a vacation, moving costs or even a wedding, depending on the platform’s rules.³

How does peer-to-peer lending work?

The P2P process differs for borrowers and lenders. Here’s what you could expect, depending on your role:

Borrowers

In many cases, if you’d like to take out a P2P loan, you can visit an online P2P lending platform and prequalify without negatively affecting your credit score. You can research lending platforms online on sites like Investopedia to find the best lender for your situation.⁴ Prequalification gives you an idea of the loan amount and interest rate you might qualify for before you complete a loan application.⁵

If you decide that you want to move forward and formally apply for a P2P loan, you can fill out an application online. Once you apply, the lending platform will likely perform a hard credit check, which might temporarily bring down your credit score.⁶ You’ll likely face a hard credit check when applying for a loan from a traditional lender, too.

While some P2P lenders may approve loans in a few hours, others could take days or weeks. Upon approval from one (or multiple) lenders, you could close the loan and collect your money, usually through a direct deposit to your bank account. You’ll then pay back your loan through fixed monthly payments with interest (the cost of borrowing) based on the terms you agreed to when you signed for the loan.⁷

Lenders

If you want to be a lender, do your research to compare P2P lending platforms. Once you have selected a lending platform, open an account with the platform and put money into your account. Select the interest rate you’d like to receive from the choices offered. Borrowers will then submit loan applications within the platform detailing their needs and financial information. You can review the borrowers’ profiles through the platform to decide which requests you would like to fund.

As a lender, you should understand that you likely will not be protected if a borrower defaults on their loan, and there’s no guarantee you’ll get the return on your investment you anticipated. While P2P lending could help you earn passive income, you should be prepared for the risk that it involves.⁸ Depending on your situation and personal preferences, you may be able to split your money among multiple borrowers, potentially reducing the risk of investing in only one borrower.⁹

Pros and cons of peer-to-peer lending

Just like any other type of loan, P2P lending comes with benefits and drawbacks for borrowers to consider, including:

Pros

• Less rigid credit requirements: Most P2P lending platforms are open to borrowers with a range of credit scores. There’s a good chance you’ll qualify, even if you have less-than-perfect credit.
• Fast funding: While approval times vary, depending on the platform, you may get funded within a day or two, just as fast as a personal loan from a traditional lender. You might not need to wait long to cover your planned or unplanned expenses.
• Small loan amounts: Sometimes it may be hard to borrow small amounts from traditional lenders. If you only need to borrow $1,000, for example, you might be able to do so with a P2P lender. Many P2P lenders fund smaller loans called microloans.

Cons

• Costly fees: Many P2P loans come with high fees that can make your loan more expensive. If you take out a P2P loan, you may have to pay loan origination, maintenance and other fees in addition to interest.¹⁰ Some loans from traditional lenders come with fees as well.
• Higher interest rates: Compared to traditional lenders, P2P lenders tend to charge higher interest rates.¹¹ A higher interest rate may mean you pay more over the life of the loan.
• Geographical restrictions: Some P2P lenders limit which states they serve. Depending on where you live, you may not be able to secure financing with certain P2P lenders. You may face geographical restrictions with traditional lenders, too.

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

P2P lending is usually safe for borrowers when reputable platforms are involved. It’s important to do your own research online when selecting a P2P lending platform. Note that if you’re a borrower finding it challenging to pay back your loan, even reputable P2P lenders tend not to offer the same support as a traditional lender.¹²

There are some risks to consider on the lender side. A lender may not receive the money they are owed and the interest they are counting on if a borrower fails to pay back their loan. There are few protections against this scenario if it occurs.¹³

Before using a P2P lending platform as a borrower or a lender, do your research to avoid loan scams. Check out reviews to get an idea of the platform’s reputation and check what kind of security they have in place in terms of encryption and regulatory compliance.

Also, read the fine print of your loan agreement before you sign to avoid unwanted financial surprises down the road.

---

---

Know your lending options

P2P lending could be helpful in some situations. However, as with all financial decisions, it’s a good idea to familiarize yourself with how it works and what risks you may face.

An alternative to a P2P loan is a personal loan from OneMain. OneMain offers personal loan amounts from $1,500-$20,000 with loan terms ranging from 24-60 months. Every OneMain personal loan offers fixed payments and clear, upfront terms. At OneMain, it only takes a few minutes to check for prequalified offers, and checking won’t impact your credit score. If you’re approved, you can receive your funds as fast as one hour after loan signing.^¶

Sources

1,2,3,5,6,7,8,9,13 https://www.bankrate.com/loans/personal-loans/peer-to-peer-lending/
4 https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp
10,11,12 https://www.equifax.com/personal/education/personal-finance/articles/-/learn/peer-to-peer-lending/