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Understanding Peer-to-Peer Lending

Chime Team • July 6, 2022

Peer-to-peer lending (P2P lending) is a form of online lending that allows individual investors to work directly with people or businesses looking for loans. Discover how these platforms work and the pros and cons of peer-to-peer lending.

Typically, if you need to borrow money, you might visit your local bank to see if you can be approved for a loan. But traditional financial institutions and banks can have more rigid income and credit requirements when it comes to lending, which can make borrowing challenging for some.

Luckily, today there are several different ways to borrow money. A new approach to the loan industry is peer-to-peer lending, also known as P2P lending. These services are web-based alternatives to the traditional lending route, such as using banks or credit unions. Peer-to-peer lending can make shopping for loan rates quick and easy and can also be a more affordable option, depending on the loan type. 

For those who have the funds to lend out, peer-to-peer lending can also be a money-making opportunity. This form of social lending makes financing and investing more accessible, and it’s an option that has worked for millions of borrowers and investors. Experts predict that the peer-to-peer lending market will grow to around 30% by 2027.

Let’s learn more about peer-to-peer lending, how it works, and if it might make sense for your borrowing or investing goals.

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What is peer-to-peer lending (P2P lending)?

Peer-to-peer lending is an online lending service where independent investors fund loans for individuals looking to borrow money. In return, the investors themselves collect the interest fees a borrower would typically pay back to a bank or financial institution. Most P2P loans usually don’t require any collateral. The entirety of a borrower’s loan may be funded by a single investor or by a group of different investors pitching in smaller amounts. 

By cutting out the middleman, a P2P lending service gives investors a chance to receive a bigger return on their initial investment. But at the same time, those investors take on the risk of loaning money to a customer or business that may not repay their loan as promised. P2P lending offers both secured and unsecured loans — however, most of the loans are unsecured personal loans

How does peer-to-peer lending work?

Peer-to-peer lending basically works by connecting online borrowers who need funds to investors who can issue loans, even though they never directly interact. You can compare it to how eharmony does the legwork for you to find your perfect match, without the actual talking and dating stuff.

From determining loan eligibility, setting the interest rates and fees, and collecting payments, the platforms handle it all. Altogether, P2P lending is a fairly straightforward process. Let’s see what it looks like for both the borrower and the investor. 

Peer-to-Peer lending for borrowers 

Here’s what the process will usually look like if you’re a borrower who wants to utilize P2P  lending:

  1. Compare P2P platforms and lending guidelines. (Marketplaces can have different fees, interest rates, minimum credit score requirements, max loan amounts, etc.) 
  2. Apply to the platform that you like by filling out its application. This may require a credit check, but some sites allow you to apply for a pre-approval. (Remember, this is a soft inquiry and doesn’t affect your credit score.)
  3. If approved, calculate your monthly payment based on your given interest rate and terms. Then determine if your payments are within your budget.
  4. Wait for investors to review your listing. Depending on investor interest, your loan could be fully funded within the same day or until your listing expires. 
  5. When approved, you’ll receive the funds and start making scheduled loan payments.

Peer-to-Peer lending for investors

Now let’s walk through the process for an investor:

    1. Compare P2P platforms and their investor guidelines. (Look out for service fees, as these will ultimately cut into your investment’s return.)
    2. Once you choose a site, create an account.
    3. Examine loan options and assess risk. 
    4. Choose an investment and allocate funds. Some investors choose to partially fund loans.
    5. Log in to the site to check your earnings and your investments’ progress. Then, you can either reinvest any profits made or withdraw them. 

Types of peer-to-peer loans

P2P loans initially started out as personal unsecured loans that you could borrow for any legal purpose and didn’t have to pledge collateral. Personal loans are still the most common P2P loans, and they’re also the most flexible. However, they aren’t the only ones. Let’s take a look at the 3 main types.

Peer-to-peer personal loan lending

P2P personal loans can be used to cover things such as medical bills, car purchases, home improvements, vacations, other large purchases, or debt consolidation. They act the same as a personal loan from a traditional bank or financial institution, except, of course, it’s funded by individual investors instead.

Peer-to-peer business loan lending

Small or new business owners may use P2P loans to grow their businesses and increase their odds of getting funds. They may use P2P funds for marketing, creating new products, or payroll. Business borrowers have an audience of multiple lenders on these P2P sites, which can be very appealing.

Peer-to-peer student or educational loan lending

P2P student loans are usually given as a lump-sum loan to give the borrower discretion on how to break up the money for school-related expenses. Although it’s best to use federal student aid options before considering other loans, P2P lending platforms can offer competitive rates for student loans as well.

P2P Lending State Restrictions
P2P loan offerings can be limited in some places, like these restrictions in Iowa. Always explore any limitations before making a commitment.

Where to get a peer-to-peer lending loan

There are several online marketplaces that offer P2P loans. Once a borrower has identified the type of P2P loan they want to apply for, they’ll need to choose a lending site. Then, once their application is approved, they’ll need to review the loan terms and interest rate that they’re offered. 

If the borrower is content with the terms, they can submit their loan listing to the platform and wait for investors to fund it. This is usually when a hard credit check will happen. Once the P2P  loan is funded, the funds will be deposited into the borrower’s bank account, and they’ll need to keep up with the agreed-upon scheduled payments.

Popular P2P lenders

The P2P lending industry has become increasingly popular. In 2022, the size of the P2P lending industry in the U.S. is nearly $938.6 million, according to data from IBISWorld. The list of P2P lending platforms is continually growing, but these 6 lenders currently represent some of the biggest names in the business:

  • Upstart
  • Prosper
  • Peerform
  • SoFi
  • LendingClub
  • Funding Circle (business lending)

Although these are popular sites, always be sure to research any lender on your radar, and look at reviews from reputable sources before applying for a loan. To borrow, you’re required to provide sensitive and personal information, so you’ll want to make sure you’re in good hands.

How to qualify for a peer-to-peer lending loan

P2P lenders will check credit scores to qualify borrowers, and they’ll also consider the length and amount of a loan to help determine the interest rate. Qualifying credit scores may vary, but a credit score greater than 580 is generally required. As the same with other personal loans, the better your credit score, the better the loan term and interest rate will be.

P2P lending can be an option for those with lower credit scores since individual investors have more wiggle room in setting approval odds than traditional financial institutions. P2P lending applications tend to be standard, so have your financial information and ID ready when you go to apply.

Peer-to-peer lending pros and cons

With most financial products, there are usually pros and cons to consider and weigh, especially when it comes to borrowing money. Let’s look at some of the benefits for both the borrower and the investor when it comes to P2P lending, along with the disadvantages.


For the BorrowerFor the Investor
Quick funding process: 

You’ll complete your application within a few minutes, and if you’re approved, you can sometimes expect your money within a week. 

Higher returns:

P2P lending generally provides higher returns relative to other types of investments.

Lower interest rates: 

P2P loans usually come with lower interest rates than banks because of the big competition between lenders.

Easier to diversify your portfolio: 

P2P lending platforms can make it very easy to spread capital across multiple investments to help reduce risk. 


For the BorrowerFor the Investor
You might have more fees: 

P2P lenders tend to charge origination fees, ranging from 1% to 8% of your loan amount

Not federally protected: 

The government doesn’t provide insurance or any form of protection to lenders in case of the borrower’s default. P2P investments also aren’t FDIC insured.

Missed payments can hurt your credit score

If the borrower misses a payment, the P2P lender can submit those details to credit bureaus. This could result in collection agencies trying to reclaim unpaid funds.

More risks: 

Even investors with good app ratings and credit scores may not pay back their loans.

Alternatives to peer-to-peer lending

P2P lending can be an innovative way to borrow money, especially for those who struggle to qualify for traditional loans. But, it’s not the perfect borrowing option for every person. Consider these alternatives if you need to access funding but don’t believe P2P lending is the right fit for you:

  • Personal loans: These loans can be used to help pay for unexpected expenses, and if you have a fair credit score, you’re bound to secure a fair rate.
  • Credit cards: Credit cards can be great financial tools to help you establish credit history and earn rewards. However, the average credit card interest rate can be high, and it can also be an expensive way to finance bigger purchases over a long period of time.
  • Home equity line of credit: Homeowners can consider a home equity line of credit (HELOC), which is a revolving financing tool that has the flexibility of a credit card or other type of loan, but with a lower interest rate

You can also talk to your personal bank or credit union when looking to borrow funds. Your financial institution can view how often you make deposits and how much you have in your savings account, and, therefore, it may be more open to loaning you money. 

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What credit score do I need for a P2P loan?

You typically need a score of at least 580 to get a P2P loan. However, the minimum credit score for a loan will ultimately vary by lender. If you have a low credit score, compare rates available from a P2P lending platform with those available through another lender that offers personal loans for bad credit.

How much can I borrow with a P2P loan?

Some P2P lenders offer loans up to $40,000 for borrowers who are seen as “highly creditworthy.” Most others fall in the range of $10,000 to $25,000. Before applying for a loan through a P2P lender, always be sure to check the lending limits. 

Do P2P loans show up on a credit report?

P2P lenders report payment information to the credit bureaus, just like traditional creditors and lenders do. This means on-time payments on a P2P loan will improve your credit over time, while late or missed payments can hurt your credit score.

What fees do P2P lenders charge?

P2P lending platforms can charge fees to both lenders and borrowers, so it’s important to review the terms of your chosen platform before you accept a loan or hand over your investment dollars. Some platforms will charge the investor an “investor service fee” that can equal about 1% of the payments received by the loan’s payment due date.

What can I use a P2P loan for?

Many P2P lenders offer unsecured personal loans, which means you can use the funds for nearly any legal purpose. However, most lending platforms do ask you to list what the loan will be used for. Popular uses for loans include home improvements, medical bills, major purchases, as well as debt consolidation. Some loans do have restrictions, such as you might not be able to use the funds to pay for higher education costs or investments.

Can I apply for peer-to-peer lending with bad credit?

P2P loans can be an option for bad credit borrowers, but they may have higher interest rates. Since the P2P lending arrangements are typically dictated by platform, it will likely depend on individual calls about what credit standards are necessary for borrowing. 

Is peer-to-peer lending safe?

Most established P2P lenders will guard your information securely just like any other financial institution would, and all communications should always take place through an encrypted browser or mobile application. P2P lending platforms are also regulated at the state and federal levels and must hold applicable licenses in the states in which they operate. 

Final thoughts

If you don’t have excellent credit, or maybe you want to cut out the middleman, P2P lending might be an option for you. But before you complete an application, you’ll always want to compare:

  • Interest rates
  • Fees
  • Repayment terms
  • Maximum loan amounts
  • Timelines

Not all lenders or platforms are run the same way, so make sure you’ve done your research before applying for a loan through a P2P lender to ensure you’re making the best move for your finances!

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