What is peer-to-peer lending?

Peer-to-peer (P2P) lending — sometimes called social lending or crowd lending — allows borrowers to get a loan from other individuals, called investors. P2P lending takes place on an online financial platform, like Prosper, which acts as an intermediary by connecting qualified borrowers to investors looking to fund loans.

While P2P lending rates may be slightly higher than bank offers, these platforms aim to make loans more accessible by accepting credit scores as low as 600. From the borrower’s perspective, they work a lot like a direct online lender, and in fact, many P2P platforms like LendingClub eventually become direct lenders. The main difference is that almost all P2P lenders charge an origination fee, and there are fewer P2P platforms to compare.

How peer-to-peer lending works

Peer-to-peer lending works a lot like any other personal loan. Most borrowers will follow a version of these steps to get a P2P loan:

1. Compare P2P lenders. Get started by comparing the APRs, origination fees, loan amounts and terms available through different P2P platforms. Also, check the requirements to make sure you’re eligible.
2. Check your rates. Fill out an application on the P2P platform’s website to see which rates and terms may be available to you. Do this with your top choices — it only takes a few minutes and is based on a soft credit pull that doesn’t affect your credit score.
3. Apply for a loan. If you decide to apply for a loan, you’ll need to fill out a full application and upload any required documentation. This step requires a hard credit pull that will show up on your report.
4. Get approved. After submitting your application and documentation, the lender will review your information and verify it for accuracy. It will also assign you a letter grade based on credit risk, which determines the rates, fees and terms you receive.
5. Wait for investors to fund the loan. While your application is being processed, investors select loans to fund based on the letter grade. Lower letter grades have a higher risk but higher returns.
6. Get your funds. Once an investor funds your loan, the platform transfers the funds to your bank account. Typically, this takes one to five business days.

After receiving the funds, you’ll repay the loan in monthly installments and the investor collects on interest. The platform receives the origination fee and may also collect on some of the interest the investor doesn’t receive.

P2P loan rates, fees and terms

Peer-to-peer loans have similar rates and terms as many online loans. However, unlike some online lenders, P2P lenders almost always charge an origination fee.

Here are the general rates, fees and terms on P2P loans:

• Rates. Rates on P2P loans typically range from 6% APR for the best credit borrowers up to 36% APR for lower credit borrowers.
• Origination fees. P2P lending platforms almost always charge an origination fee — typically between 1% and 8%. This is how P2P platforms make money, since the investor collects some or all of the interest charged.
• Terms. A typical P2P loan repayment term is between two and five years, depending on the loan amount.

It’s worth noting that not every P2P lender charges rates and fees. For example, the short-term P2P lending app SoLo Funds asks for a tip instead of charging interest or fees, similar to a cash advance app like Earnin.

Who is most likely to be researching peer-to-peer lending apps?

Finder data suggests that men aged 25-34 are most likely to be researching this topic.

How to qualify for a peer-to-peer loan

P2P platforms have similar requirements to other online lenders like Upstart and OneMain Financial. Both are designed to serve borrowers who can’t qualify for a traditional bank loan.

These are the minimum requirements at the popular P2P lending platform Prosper. While Prosper’s requirements are typical for a peer-to-peer platform, they may not be exactly the same across lenders:

• Credit score of 600 or higher
• US citizen with a Social Security number
• Over 18
• No recent bankruptcies

These lower requirements mean that peer-to-peer lending for bad credit borrowers may be available. However, most require a credit score above 600 — which Finder considers a fair credit score.

How P2P business loans work

P2P lending is also available for business owners from select lenders. The difference between P2P business loans and personal P2P loans is that you need to qualify as a business owner.

The general requirements for a P2P business loan may include:

• At least two years in business
• Annual revenue of $50,000 or higher
• Personal credit score 660 or higher

FundingCircle is one highly-rated P2P lender that offers business loans. Many users on Trustpilot report smooth application processes and fast funding.

Pros of P2P lending

There are several advantages to using a P2P platform to take out a loan.

• Flexible requirements make peer-to-peer platforms a great alternative to bank loans if you’ve struggled to qualify for financing in the past.
• Many platforms offer multiple types of financing, such as personal and business loans.
• Most have no prepayment penalties, meaning you can save on interest by repaying the loan early.
• Automated underwriting makes P2P platforms faster than a bank or credit union — though the turnaround is slightly longer than most online lenders.
• Lower interest rates than credit cards make this an inexpensive financing option for borrowers with fair credit scores above 600.

Cons of P2P lending

Consider these drawbacks before you consider getting a peer-funded loan:

• Origination fees are standard for peer-funded loans, which can result in a higher APRs and upfront cost than a direct lender.
• There are only a handful of P2P platforms out there — and many become direct lenders after establishing their lending business.
• It may take longer to receive your funds than a direct online lender, since you have to wait for investors to fund your loan.

Alternatives to peer-to-peer lending

P2P lending has advantages, but it’s not your only option to access cash. Since there are only a few P2P lenders out there, considering these alternatives alongside peer-funding platforms can help you find the most competitive offer available to you.

• Direct online lenders offer automated personal loans with a faster turnaround than a P2P lenders. There are more bad credit options through direct lenders and many offer lower APRs and no origination fee to borrowers with credit scores over 670.
• Big banks like U.S. Bank and PNC Bank also offer personal loans, but you may need to meet stricter criteria than with an online lender and turnaround times may be longer if you’re a new customer — think weeks.
• Local banks and credit unions tend to have more flexible credit requirements than big banks and can offer more favorable rates and terms.
• Lending circles are groups of individuals that pool money to fund loans for each member, letting you access small-dollar, lost-cost loans from other members when you need cash.
• Cash advance apps offer small-dollar advances on wages you’ve already earned $20 and $250 – either for a monthly fee or a suggested tip.

If P2P lending doesn’t sound like the right fit for you, browse our picks for the best personal loans to explore all your options.

Investing in P2P lending

P2P lending offers investors a way to earn a return on their investment. To get started, choose a lending platform, open an account and deposit your funds. The more you invest, the higher your potential return – but since invested funds aren’t insured, you could lose your money if the borrower defaults or the platform goes out of business.

However, you can start small. Prosper, for example, allows you to invest as little as $25. It lets you choose the loans you want to fund so you can reduce your risk.

If you want to get in on some P2P lending action as an investor, here are some things to note:

• Investors often paid monthly. Investors can be paid each month as the borrowers make their monthly payments.
• You can choose what you fund. With P2P lending, you get to choose what loans you fund. Many P2P lending sites assign letter grades for borrowers, which can help mitigate your risk.
• Income requirements may apply. Being a millionaire isn’t usually a requirement. Depending on the P2P platform, an annual gross salary of at least $70,000 may be sufficient, or you must have a specific net worth.
• Investment caps may apply. Some platforms restrict how much you can invest, such as LendingClub, which caps investments at 10% of your net worth.
• Not FDIC protected. With P2P lending, investors won’t be reimbursed if the borrower defaults on your loan investment or the P2P lending site you’re using goes out of business or fails.

Written by

Anna Serio

Editor

Anna Serio was a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY. See full bio

Anna's expertise

Anna has written 177 Finder guides across topics including:

• Personal, business, student and car loans
• Building credit
• Paying off debt