Peer to Peer Loans: Is P2P Lending Right For You?

Tara Seboldt
Aug 05, 2022

You’re talking with your neighbor when they mention they need a new car. Unfortunately, they’re having a hard time getting a car loan from traditional lenders. You tell them you wish you could pool money with other neighbors to offer them a loan directly.

This is the concept of peer-to-peer lending. Individual investors lend money to borrowers through lending platforms.

But can peer-to-peer loans help communities take care of one another financially? Are lending platforms hard to find? Keep reading to learn more about peer-to-peer financing and if it’s a feasible option for funding your neighbors. (Or your own needs.)

What is Peer to Peer Lending?

Peer-to-peer (P2P) lending is a type of loan that connects individual borrowers with individual investors. This means P2P loans don’t go through a traditional bank or credit union.

Instead, investors commit money for lending and choose which loans they want to invest in. Loan funds come from pooling money from multiple investors.

For example, let’s say you’re looking for a $5,000 personal loan. You apply for a loan and five individual investors fund your loan with $1,000 each.

Like traditional loans, you’ll have fixed monthly payments that include interest.

Your peer-to-peer lenders get their money back (plus interest) upon repayment.

What are Peer Lending Platforms?

P2P loans originate on P2P lending sites. These websites, or platforms, provide the service of connecting investors and borrowers.

Lending platforms make money by managing all aspects of the lending process for investors. They handle the loan application process, including loan underwriting and approval. They then charge investors a fee or percentage of returns to use the platform.

What Can I Use P2P Loans for?

The majority of peer-to-peer loans are unsecured personal loans. This means borrowers can use the loan for almost anything. In unsecured loans, borrowers also don’t have to provide collateral for the loan.

Common uses for P2P loans include:

Some P2P lending platforms also offer specialized loan products.

For example, a platform might specialize in small business loans for entrepreneurs. This lets you invest in small businesses or get funding for your business venture.

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Is Getting Peer-to-Peer Loans Easy?

Yes—and no.

Although non-traditional loans are still a popular funding option, peer-to-peer platforms are becoming difficult to find.

According to an article from Kiplinger, most of the major P2P lender platforms have switched to working with larger financial institutions. That means you won’t be able to invest in a neighbor’s loan.

For example, Upstart now funds loans using money from banks and credit unions instead of individual investors. Other platforms—like LendingClub—now work with banks and hedge funds to finance loans.

On the other hand, the P2P platforms that exist may make it easier for borrowers to get approved for a loan. P2P lenders can often make loan offers to borrowers with a low credit score or short credit history.

Additionally, borrowers with a good FICO score may qualify for lower interest rates through P2P platforms than traditional lenders.

Qualifying for P2P Loans

Each peer-to-peer platform has different eligibility requirements for loans. You’ll have to go through a credit check to apply for a P2P loan.

On top of that, different investors will have varying risk tolerance when funding loans.

Someone with an excellent credit score, for example, may have a lot of loan offers on a P2P platform. A borrower with poor credit may not qualify for loans on certain platforms or may face higher interest rates.

Despite differences between platforms, the overall loan application process usually looks like this:

  1. You fill out an online application for a loan.
  2. The platform determines your creditworthiness and assigns a credit rating.
  3. You get loan offers with various repayment terms—such as loan term, loan amount, and interest rate.
  4. Choose a loan and get funds in your bank account in about one business day.

Popular P2P Loan Platforms

While it may be more difficult to find a P2P platform, the two most popular—Prosper and Kiva—deliver loan products for a variety of borrowers and investors.

Prosper

Prosper is one of the best peer lending platforms for personal loans. They also offer home equity line of credit (HELOC) options for homeowners.

Kiva

Kiva is a nonprofit P2P lending company that helps small businesses around the world. They’re especially dedicated to providing loans to underprivileged business owners.

Investors in Kiva loans don’t earn interest on their investments. It’s simply a way for investors to give back to communities.

I Want to Help My Neighbors. Is P2P Lending the Answer?

You might be able to use a peer-to-peer loan to help your neighbors.

For example, you could help them set up a new loan on a P2P platform. Or, if they run a small business, you could use a platform like Kiva to fund their loan.

However, peer-to-peer lending isn’t the only way for a community to come together to help neighbors.

Let’s take a look at how P2P loans benefit borrowers and investors and explore a few alternatives.

Benefits of Peer-to-Peer Loans

  • More Accessible for Borrowers: P2P loans may be available for borrowers with bad credit and have more loan options
  • Potential to Build Credit: Payment history for P2P loans usually shows on a borrower’s credit report
  • Potentially High Returns for Investors: Investors often earn more interest from P2P lending than they would from traditional savings accounts
  • Choose Your Investing Risk: Investors can choose to fund borrowers based on their credit rating

Peer-to-Peer Lending Alternatives

Community members who want to help their neighbors aren’t limited to peer-to-peer lending platforms. These alternatives to P2P lending could help you build a stronger sense of community.

Crowdfunding

Crowdfunding platforms—such as GoFundMe—let friends, family, and strangers donate money to those in need. Unlike P2P lending, you won’t get your money back if you donate to a crowdfunding account.

Using crowdfunding can be a good way to help someone who’s fallen on hard times.

For example, your neighbor was in a car accident and now faces medical bill debt. You could set up a crowdfunding account for community members to donate funds.

Please note that as with all donations, you will need to do your due diligence donating via these types of platforms. While most people have a real need, there is still a chance for scammers to use the platform for nefarious purposes.

Community Donations and Events

Another way to crowdfund for your neighbors is to host a community event to raise money.

Let’s say you host a trivia night for your injured neighbor. Local businesses help cover the expenses of running the event by donating food, event space, and prizes.

Community members pay to participate and funds go to your neighbor’s medical expenses.

Non-Monetary Help

You can help create a sense of community even without lending money. There are lots of ways to help your neighbors, such as:

  • Babysitting or petsitting
  • Mowing their lawn
  • Preparing meals
  • Running errands

Are There Downsides to a Peer-to-Peer Loan?

Like traditional loans, P2P loans have their own set of drawbacks. Some reasons you might want to reconsider a P2P loan include:

  • Higher interest rates for bad credit: Borrowers with lower credit scores tend to pay higher interest rates.
  • Platform fees: Origination fees, prepayment penalties, and late fees can all make P2P loans costly.
  • May not have protections: P2P loans are investments and are not FDIC insured like bank accounts.
  • Many platforms have removed P2P lending: Simply put, it could be difficult to find a P2P lender, with major players like PeerForm and LendingClub leaving the P2P scene.

Bottom Line: P2P Loans

While many P2P platforms have shifted their focus to institutional investors, P2P loans are still available.

The platforms that remain let you help people just like you get the financing needed to buy new cars, pay off high-interest debts, grow their small businesses, and much more.

As with any investment, P2P lending comes with risks. If you’re thinking of investing, be sure to research the platform and consider the potential risk of investing.

Tara Seboldt

Tara is a financial writer with over five years of professional writing experience. She previously worked at a financial planning firm. Tara uses this professional experience to help readers better understand their finances and make smart financial moves. When she’s not writing about money, Tara enjoys spending time in the Idaho mountains hiking, camping, and skiing.

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