Peer-to-peer lender explained

Writer and editor - Bryan Robinson | Updated on 2023-03-05

What is a peer-to-peer lender?

A peer-to-peer lender is an online platform that allows investors to fund personal loans and earn a return.

Peer-to-peer lending platforms cut out the middleman – namely banks – which can save borrowers money on interest rates and origination fees.

Borrowers can use peer-to-peer loans for a variety of purposes, including debt consolidation, home improvement projects, medical expenses, and more.

Lenders earn money by funding loans and collecting repayments from borrowers, which typically include interest and origination fees.

How do peer-to-peer lenders work?

Peer-to-peer lending is a financial arrangement in which individuals (peers) lend money to other individuals, usually without going through a traditional financial institution such as a bank.

Peer-to-peer lending is also sometimes referred to as person-to-person lending, social lending, or P2P lending.

The peer-to-peer lending process typically works as follows:

  1. An individual (the borrower) who needs a loan applies for it through a peer-to-peer lending platform.
  2. The loan is then funded by one or more individuals (the lenders).
  3. The borrower makes regular payments to the lenders, and when the loan is repaid, the lenders receive their money back plus interest.
  4. The peer-to-peer lending platform typically charges a fee for facilitating the loan.

Peer-to-peer lending is a relatively new concept, and it has only become possible in recent years due to advances in technology. The first major peer-to-peer lending platforms appeared in the early 2000s, and the industry has grown rapidly since then.

Today, there are several dozen major peer-to-peer lending platforms operating in countries all over the world, and this type of borrowing has become an increasingly popular alternative to traditional bank loans.

Advantages of using a peer-to-peer lender

When you work with a peer-to-peer lender, you are working directly with another person or institution, rather than going through a bank. This can offer a number of advantages, including:

  • Flexible repayment terms: Peer-to-peer lenders are often willing to work with you to establish repayment terms that fit your budget.
  • Lower interest rates: Peer to peer lenders may charge lower interest rates than banks, because they are not subject to the same regulations.
  • No hidden fees: Peer to peer lenders are required to disclose all fees upfront, so there are no surprises later on.

Of course, there are also some risks to consider when working with a peer to peer lender. These include the possibility of late payments or non-payment, and the possibility that the lender may change the terms of the loan at any time. It is important to carefully research any peer to peer lender before you agree to work with them.

Disadvantages of using a peer-to-peer lender

There are some potential disadvantages to using a peer-to-peer lender, including the following:

  • You may not be eligible for the lowest interest rates. Interest rates on peer-to-peer loans are generally based on your creditworthiness, so if you have a lower credit score, you may not qualify for the best rates.
  • There is a risk of default. Although peer-to-peer lending platforms do their best to screen out borrowers who are likely to default on their loans, there is always a risk you could end up with a borrower who cannot repay the loan. In this case, you could lose all or part of your investment.
  • Your money may be tied up for a long time. Most peer-to-peer loans have terms of three years or longer, which means your money could be tied up for a significant period of time. If you need access to your money sooner, you may want to consider another investment option.

How to find the best peer-to-peer lender

Peer-to-peer lending is a type of lending that allows people to borrow and lend money without going through a traditional financial institution. It’s a great way to get a loan with competitive interest rates, and it can be a good option for borrowers with good credit. But how do you know if you’re getting the best deal?

Here are some things to look for when you’re shopping for a peer-to-peer lender:

  1. Check the interest rates: Peer-to-peer lenders typically offer competitive interest rates, but it’s still important to compare rates from different lenders. Remember to also compare the origination fees and any other fees that may be charged.
  2. Review the loan terms: Peer-to-peer loans typically have shorter terms than traditional loans, so it’s important to review the terms carefully. Make sure you understand the repayment schedule and if there are any prepayment penalties.
  3. Compare the fees: Peer-to-peer lenders typically charge origination fees and servicing fees. Compare these fees across different lenders to make sure you’re getting the best deal.
  4. Read the reviews: Before you choose a lender, read reviews from other borrowers to get an idea of their experience. Check out sites like LendingClub and Prosper to see what others are saying about different peer-to-peer lenders.
  5. Shop around: Don’t just choose the first peer-to-peer lender you come across. Shop around and compare offers from multiple lenders before making your decision.
Bryan Robinson

Bryan Robinson
Writer and editor

Bryan Robinson is a finance writer with expertise in lending and their interest rates, fees, contracts and more.
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