Peer-to-Peer Lending: How-to Guide for Borrowers & Investors
Saving money on peer peer lending borrowers does not have to be complicated. We rounded up the essentials so you can spend less and skip the guesswork.
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Peer-to-peer lending relies on a crowdsourcing model where other people can fund your loan. Peer-to-peer funding attracts two different types of people: borrowers who need money, and investors who want to make money funding other people’s loans.
Written by Lindsay VanSomeren Last Updated: April 1, 2025 Reviewed by Zina KumokSome of the links on DollarSprout point to products or services from partners we trust. If you choose to make a purchase through one, we may earn a commission, which supports the ongoing maintenance and improvement of our site at no additional cost to you. Learn more.
If you’re in the market for a loan, there’s a good chance you’ve come across “peer-to-peer” or “P2P” lenders.
Peer-to-peer lending relies on a crowdsourcing model where other people can fund your loan. Unlike GoFundMe, these aren’t people you know. These are third-party investors.
Peer-to-peer funding attracts two different types of people: borrowers who need money and investors who want to make money funding other people’s loans.
It’s a fast-growing model. In 2014, peer-to-peer lending platforms issued $5.5 billion in loans, and PricewaterhouseCoopers predicts that peer-to-peer lending will grow to a $150 billion industry by 2025.[1]
Peer-to-peer lending offers a lot of benefits whether you’re looking to borrow or make money by investing in p2p loans.
What Is Peer-to-Peer Lending?
Peer-to-peer lending relies on websites that serve as a marketplace to connect individual borrowers with lenders. The most popular ones are LendingClub, Prosper, and Upstart.
Some people think that peer-to-peer loans remove the middleman, i.e. the bank, from the equation. That’s not entirely true, however. A bank still funds and issues the loan. For example, WebBank, a Salt Lake City-based online bank, frequently funds loans from peer-to-peer lenders.
The difference with peer-to-peer lending is that individual investors purchase a portion of that debt in the form of a note. Investors assume all the risk if a borrower defaults on the loan, but they get rewarded with interest if a loan is paid off. It’s a roundabout way of funding a loan.
For borrowers, using peer-to-peer lending may be cheaper than working with a bank or other lender. If you have a poor credit score, you may even be approved for a loan when other lenders won’t give you money, although you could end up paying high interest rates.
How Does Peer-to-Peer Lending Work?
A borrower first applies for a loan through a peer-to-peer lending site. If they’re approved, the website will then create a listing that individual investors can see, including the following details:
- The loan amount
- The loan’s purpose
- The borrower’s financial details, such as credit score and income
All identifying information is kept confidential. Investors can’t see your name, Social Security Number, address, race, or any other personal information.
They see what they need to make a decision on whether to back your loan or not. In some cases, investors may be able to sort loans by location, but that’s about as specific as it gets.
Your best friend could log in and fund your loan and they’d never know unless you told them you were applying for a loan. If you’re a borrower, you’ll never see any details about who’s funding your loan.
Websites typically allow listings to stay posted for a few weeks. During this time, investors can choose to fund your loan in increments as small as $25 on some platforms. They can also choose to fund the whole amount.
This is an attractive proposition for investors because this spreads their risk out so they’re not putting all their money into one loan.
Once a loan is fully funded, it will be dispersed to the borrower and paid back just like any other loan.
One of the downsides of peer-to-peer lending is that it’s possible your loan doesn’t get funded. If that’s the case, the website will typically offer you a smaller loan than you’ve requested, but you may reject that offer. This is a rare possibility, but it does happen.
Types of Peer-to-Peer Loans
Most peer-to-peer loans are issued as unsecured personal loans. You can generally use these for a wide range of purposes including:
- Vacations
- Weddings
- Debt consolidation
- Medical or veterinary care
- Home renovations and repairs
- Informal education, such as coding boot camps
Most personal loans don’t allow you to use the funds to pay for college costs, investments, or illegal activities.
Depending on the platform, you may also be able to get other types of loans, including:
- Auto loans
- Business loans
- Real estate loans for specific purposes, such as landlord renovations or bridge loans
6 Peer-to-Peer Lending Platforms to Look Into
There are numerous popular platforms where you can find P2P loans, but each has its own rates and rules.
1. Prosper
Prosper is the first peer-to-peer lender and began in 2005. Since then, it’s issued $15 billion in loans.
Prosper borrowersProsper offers personal loans for numerous purposes such as debt consolidation, engagement rings, and adoption. It also offers short-term real estate, auto, and small business loans. It will even be offering HELOCs soon.
- Amounts: $2,000-$40,000
- Term length: 3 or 5 years
- APRs: 7.95-35.99%
- Origination fee: 2.41-5%
Disclosure: For example, a three-year $10,000 personal loan would have an interest rate of 11.74% and a 5.00% origination fee for an annual percentage rate (APR) of 15.34% APR. You would receive $9,500 and make 36 scheduled monthly payments of $330.9. A five-year $10,000 personal loan would have an interest rate of 11.99% and a 5.00% origination fee with a 14.27% APR. You would receive $9,500 and make 60 scheduled monthly payments of $222.39. Origination fees vary between 2.41%-5%. Personal loan APRs through Prosper range from 7.95% to 35.99%, with the lowest rates for the most creditworthy borrowers.
Eligibility for personal loans up to $40,000 depends on the information provided by the applicant in the application form. Eligibility for personal loans is not guaranteed and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. Refer to Borrower Registration Agreement and all terms and conditions for details. All personal loans made by WebBank, Member FDIC.
Prosper investorsIt’s simple to start investing in notes with Prosper because you only need $25 to purchase a note.
You can choose each note yourself with filters or use an auto-investing feature with set parameters. Prosper charges a fee of 1% of the outstanding principal balance.
2. LendingClub
LendingClub is one of the largest and most well-known peer-to-peer lending platforms. It’s been around since 2007 and has issued over $47 billion in loans since then.
LendingClub borrowersLendingClub’s biggest business is its personal loans, but it also offers auto refinancing, business loans, and medical and dental loans.
- Amounts: $1,000-$4,000
- Term lengths: 3 or 5 years
- APRs: 6.95-35.89%
- Origination fee: 1.00-6.00%
To invest in notes with LendingClub, you’ll need to deposit at least $1,000 into your investing account. You can select individual notes by filtering for credit risk, location, term length, loan purpose, or other features.
Each note is for $25, and you can choose each indiv
Final Thoughts
The bottom line: a little research on peer peer lending borrowers goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.
Originally published at dollarsprout.com.
Lindsay VanSomeren
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