The history of US peer-to-peer lending

What is peer-to-peer lending?

P2P lending is a relatively new form of credit that focuses on financing borrowers with their “peers” — small lenders and individuals that earn interest on the money they lend. Borrowers can apply through an online platform for personal loans, often unsecured, that are financed by one or more “peer” investors.

The P2P “lender” is not an actual lender, but rather an intermediary that facilitates the lending process and provides the platform. These platforms have developed in US, UK, Australia and other financial markets, but the US remains the leader in the peer-to-peer lending space.

The financial sharing economy in the US

Peer-to-peer lending may not have begun in the US, but it has quickly spread to dominate the personal loan market and is slowly making its way into other markets.

Beginnings and regulation

Peer-to-peer lending has come a long way in the past decade. The first company to offer peer-to-peer lending was Zopa, a UK company that has since issued more than $2.9 billion in loans since it was founded in February 2005.

In the US, the prospect of loans funded without the help of banks started in San Francisco in 2006. Its beginnings were small: Prosper launched in February 2006, followed by LendingClub. Now the largest peer-to-peer platform in the world, LendingClub started as one of Facebook’s first applications.

Before 2008, P2P lenders had fewer restrictions on borrower eligibility, and their offers weren’t registered as securities. This changed in 2008 after the Securities and Exchange Commission (SEC) intervened, citing the need for compliance with the Securities Act of 1933.

This led to major changes in the P2P space. Lenders were required to register with the commission, which kicked LendingClub out of action for six months before it could be reactivated. Others left the market altogether. Zopa’s CEO cited registering with the commission as the “key reason why we didn’t launch … in the US.”

Luring in borrowers and investors alike

In 2008, the US found itself deep inside the global financial crisis. When the banks weren’t willing to lend money, borrowers began turning to peer-to-peer platforms. Even those who were able to borrow from traditional banks found better deals from P2P lenders. Investors, shying away from the volatile stock market, saw P2P platforms as less risky.

This mindset continues today, with prime and subprime borrowers able to access credit for more competitive rates and investors willing to provide them with the funds.

Are the returns worth it?

Since 2009, investors have seen average net returns of between 5% and 9% for prime and subprime borrowers through LendingClub and Prosper Marketplace. In May 2014, LendingClub reported that it had saved borrowers $250 million in interest charges. In that same year, it facilitated $4.4 billion in loans through its platforms.

P2P is expected to continue growing. Goldman Sachs predicts that when this happens, bank profits could be reduced by as much as $11 billion (7%). This helps explain reason for the 146-year-old investment bank’s 2016 launch into the P2P space, called Marcus by Goldman Sachs.

What can other markets learn from P2P lending?

• The market is less about peers. There has been a noticeable shift in funding sources, with investment funds coming from institutional investors like hedge funds rather than individuals. LendingClub is listed on the New York Stock Exchange, and many P2P lenders are now referred to as “marketplace lenders.” While competitive rates are available for borrowers, it’s a bit more difficult for individual investors to get involved.
• It’s about good credit — for now. The 2008 regulations and market’s development have resulted in platforms focused on prime and near-prime borrowers (with credit scores over 640). There are signs this is changing. Some P2P sites, such as FreedomPlus, are targeting “emerging prime markets” — that is, those who are building or rebuilding their credit, typically with low FICO scores. While this can open the market up in a good way, it can also see a higher rate of borrower default if credit standards slip too far.
• The goal is innovation. In April 2015, LendingClub announced its expansion into car loans and mortgages, as well as a partnership with Google Business Solutions. Peer-to-peer companies are one of the most established developments of fintech, banking and financial services supported by technology. While regulation is important, it should be to foster — not hinder — its development.

Borrowers are still benefiting from P2P and the products and market are still maturing. As regulations develop with it and the nature of borrowing and investing changes, much of the potential of P2P lending remains to be seen.

Compare peer-to-peer lenders

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Name	Product	Filter Values	APR	Min. Credit Score	Max. Loan Amount
LendingClub			10.68% to 35.89%	640	$40,000	A peer-to-peer lender offering fair rates based on your credit score.	Check my rate View details		loading Fetching your data...
Upstart			6.27% to 35.99%	580 or 620	$50,000	This service looks beyond your credit score to get you a competitive-rate personal loan.	Check my rate View details		loading Fetching your data...
Prosper personal loans			7.95% to 35.99%	640	$40,000	Borrow only what you need for debt consolidation, home improvements and more — with APRs based on overall creditworthiness.	Check my rate View details		loading Fetching your data...
Peerform			5.99% to 29.99%	600	$25,000	A convenient peer-to-peer lending service with low potential interest rates.	Check my rate View details		loading Fetching your data...

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Bottom line

Peer-to-peer lending may be just over a decade old, but it’s making waves in the banking scene. Although individual lenders are being pushed out by larger lending firms, there are still quite a few P2P lenders that leave room for people to invest in their peers. And for those looking for a loan that doesn’t come from a bank, there are plenty of peer-to-peer options available for you to compare.

Frequently asked questions

• Can I get a peer-to-peer loan if I have bad credit?

  While they may be a little more difficult to find, there are still P2P lenders that work with less-than-perfect credit. Be sure to check the eligibility criteria of any lenders you wish to apply with or consider alternative loans for bad credit instead.

• Can I take out more than one peer-to-peer loan at a time?

  This varies between lenders. There are some P2P lenders that allow consecutive borrowing, but you may have to meet a more stringent requirements, such as making a certain number of repayments, before you qualify.

• Are peer-to-peer business loans available?

  Yes. You can read our guide to P2P business loans to learn more about how you can fund your business through peer-to-peer lending.