What is P2P lending and how does it work?

Peer-to-peer (P2P) lending was designed to help borrowers and business owners who couldn’t qualify for a traditional loan connect with investors. But while it’s faster than a bank loan, it can take longer than direct online lenders — and usually comes with more fees. It can also carry a high default rate for investors.

Best peer-to-peer lending platforms

• Prosper: Best for debt consolidation
• Upstart: Best for highly educated professionals
• Peerform: Best for fair credit
• LendingClub: Best for business financing

Best for debt consolidation: Prosper

Finder Rating: 3.42 / 5

★★★★★

Check my rate

640
Min. Credit Score

6.95%
Starting APR

$40,000
Loan Amount

Prosper’s flexible debt-to-income (DTI) and credit score requirements make it a great choice for debt consolidation. And you can check what rates you can qualify for without affecting your credit score. But it can take up to five business days to get your funds, and its origination fee falls on the high side, even compared to other P2P lenders.

Loan details

• Details
• Pros and cons

Min. Loan Amount	$2,000
Max. Loan Amount	$40,000
APR	7.95% to 35.99%
Interest Rate Type	Fixed
Min. Credit Score	640
Minimum Loan Term	36 months
Maximum Loan Term	60 months
Turnaround Time	Up to five business days

Pros

• Accepts DTI rates of up to 50%
• Fair credit OK
• No hard credit check for preapproval

Cons

• High maximum APR of 35.99%
• Origination fee starts at 2.41% to 5%
• Turnaround may be up to 5 business days
• You must have at least three open credit accounts to qualify

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Best for highly educated professionals: Upstart

Finder Rating: 4.15 / 5

★★★★★

Check my rate

620
Min. Credit Score

6.27%
Starting APR

$50,000
Loan Amount

Your level of education and work experience can get you better rates and terms with this P2P lender. And it’s fast compared to other P2P lenders — you can get your money in as soon as the next business day. But its origination fees are higher than average, and its tight DTI requirements make it less-than-ideal for debt consolidation.

Loan details

• Details
• Pros and cons

Min. Loan Amount	$1,000
Max. Loan Amount	$50,000
APR	6.27% to 35.99%
Interest Rate Type	Fixed
Min. Credit Score	620
Minimum Loan Term	36 months
Maximum Loan Term	60 months

Pros

• Work and education get you better rates
• Funding as soon as the next business day
• Accepts fair credit

Cons

• Origination fee up to 8%
• DTI of 18% or lower required

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Best for fair credit: Peerform

Finder Rating: 3.2 / 5

★★★★★

Check my rate

600
Min. Credit Score

5.99%
Starting APR

$25,000
Loan Amount

With a low maximum APR, origination fee and 600 credit score requirement, this lender could be your best bet if your credit score is less than ideal. But its range of loan amounts is small, and it caps out at half what some other P2P lenders offer. And it can take several days to get your funds.

Loan details

• Details
• Pros and cons

Min. Loan Amount	$4,000
Max. Loan Amount	$25,000
APR	5.99% to 29.99%
Interest Rate Type	Fixed
Min. Credit Score	600
Minimum Loan Term	36 months
Maximum Loan Term	60 months

Pros

• Fair credit OK
• APRs starting at 5.99%
• Live chat on website

Cons

• Loans from $4,000 to $25,000
• Long turnaround
• Few customer reviews

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Best for business financing: LendingClub

Finder Rating: 3.6 / 5

★★★★★

Check my rate

640
Min. Credit Score

10.68%
Starting APR

$40,000
Loan Amount

As a P2P lender, LendingClub is able to offer faster financing than a bank without the strict requirements. Your business only needs to be around for a year and bring in $50,000 annually to qualify. And it’s willing to work with business owners with fair credit. However, its high origination fee and maximum APR can make it expensive for businesses that just barely meet these requirements.

Loan details

• Details
• Pros and cons

Min. Loan Amount	$1,000
Max. Loan Amount	$40,000
APR	10.68% to 35.89%
Interest Rate Type	Fixed
Min. Credit Score	640
Minimum Loan Term	36 months
Maximum Loan Term	60 months
Turnaround Time	As little as 4 days

Pros

• Less strict eligibility requirements
• Quick turnaround time
• Coapplicants welcome
• High Trustpilot rating

Cons

• High origination fee of 1% to 6%
• High maximum APR of 35.89%

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Disclaimer

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

† Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com.

Funding time is based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

What is peer-to-peer lending?

Peer-to-peer lending is a type of financing where individuals fund the loan, rather than a bank, credit union or online lender. Typically, peer-to-peer loans are unsecured — meaning you don’t need collateral.

They can sometimes be easier to qualify for than a traditional bank or credit union loan, though that’s not always the case. However, they can be slower than other types of online loans.

Here’s how P2P personal loans typically break down

How does peer-to-peer lending work?

Peer-to-peer lending works by connecting borrowers and business owners directly with investors using an online platform, also called marketplaces. The platform sets rates, terms, fees and loan amounts. It also often underwrites the loan — usually using an algorithm.

After underwriting, investors review borrower applications and fully or partially fund the loan. When the borrower repays it, the investor collects on interest and the platform earns money from interest and the origination fee.

History of peer-to-peer lending

Peer-to-peer lending is relatively new. The first P2P lender was UK company Zopa, which launched in 2005, shortly followed by Prosper and Lending Club in the US.

The aim was to offer affordable credit to borrowers who couldn’t qualify for a bank loan. It planned to do this by using automated underwriting to speed up the process and cut costs. But P2P platforms experienced a higher-than-expected number of defaults, cursing some to close.

The P2P lending market was worth around $231.09 billion in 2017, and is expected to reach $820.7 billion in 2025, according to a 2019 report by Adroit Market Research. Investors generally see an average return of around 5% with platforms like Prosper and LendingClub.

For a more in depth look at its history, read about how peer-to-peer lending got started in the US.

Pros and cons of P2P lending

Peer-to-peer lending isn’t right for everyone. Weigh the benefits against the drawbacks to decide if it’s the best fit for you.

Who is peer-to-peer lending best for?

Peer-to-peer lending can be a great starting place for borrowers, business owners and investors who are new to the game.

For borrowers

Peer-to-peer loans are best for borrowers who are building their credit, but are solidly invested in a career. These platforms typically rely less on credit score than a traditional lender and use other data to evaluate your creditworthiness, like your work and education history.

For business owners

P2P business lending platforms are ideal for business owners who have fair credit and have struggled to qualify for traditional bank loans. They typically have less-strict credit and revenue requirements, as well as a more streamlined application process.

For lenders

Peer-to-peer lending is best if you’re used to earning returns on a CD or high-yield savings account and are ready for a slightly higher return. You don’t need to be an accredited investor to qualify — you can sometimes even use a retirement account to invest.

When to consider other types of lenders

Taking out a P2P loan might not be the best choice if any of these situations ring true for you:

• You have bad credit. Even with more relaxed credit requirements, you typically need at least a 640 credit score to qualify with most platforms.
• You have an emergency expense. You might have to wait a week or more for investors to fund your loan. Consider a direct online lender instead if you need money tomorrow.
• You’re in serious debt. You likely won’t qualify if your monthly debt payments are worth more than half your income or revenue.
• You can’t pay fees. Most P2P lenders charge origination fees, so you might want to look elsewhere for a personal loan without fees.

What types of P2P loans are available?

Peer-to-peer lenders generally specialize in:

• Unsecured personal loans. Peer-to-peer loans generally don’t require collateral and you can use them for any legitimate purpose, including debt consolidation.
• Medical loans. Some lenders like Prosper and LendingClub offer funding through healthcare facilities to fund medical procedures.
• Car or home loan refinancing. Some platforms also won’t fund a new vehicle or home loan, but might let you trade in your current balance for a better deal.
• Home improvement loans. Providers like Prosper also offer funding specifically for home improvements.
• Business loans. Lenders also offer P2P business loans for small businesses. These business loans can help grow your business or get it up and running.

Is peer-to-peer lending safe?

Generally, yes as long as your lender uses SSL security on its online application. Look for the lock feature to make sure the site is secure — and scroll down to the bottom of the page to look for other security badges.

You can make sure the lender you’re working with is legit by reading online reviews and looking out for lawsuits against the lender. Our guide to spotting personal loan scams can tell you what to watch out for.

4 questions to ask when comparing peer-to-peer lenders

Make sure you’re ready to borrow with these four questions:

1. 1. Am I eligible? Make sure you meet basic credit, income or revenue requirements — or even fill out a prequalification application to see if you make the cut.
   2. What’s the APR? This tells you how much your loan will cost in interest and fees over one year and is the easiest way to compare offers from different lenders.
   3. What’s the origination fee? Most P2P lenders charge a fee before handing you over the funds, which it either adds to or subtracts from the loan balance.
   4. Does it fit my budget? Use our monthly payment calculator to find out if the rates and terms you qualify for are affordable.

How can I benefit as an investor?

If you’re looking to get involved in peer-to-peer lending as an investor, you may benefit from some of the following positive points:

• Returns. Many investors have returns of around 5% for a short-term investment.
• Opportunity to diversify. You choose how much to fund per loan and can spread your risk among multiple borrowers.
• Easy for first-time investors. P2P lending is lower stakes and can be easier to navigate than diving into the stock market.
• Different accounts available. You can have multiple account options with some providers, including retirement accounts or standard investment accounts.

Bottom line

Peer-to-peer lending can be a great opportunity for borrowers, business owners and investors who are new to the game. It’s easier to qualify with a limited credit history, and you don’t need to be a seasoned investor to get returns. But it might not offer as good of a deal as other options.

You can find out how P2P loans compare to others with our guides to personal loans and business financing. Or check out how the returns compare with our guide to investing.

Frequently asked questions

• Will my loan have multiple investors?

  It depends. Most investors attempt to spread out their funds to limit losses, but if you’re only requesting a small loan amount, you may end up with a single investor interested in funding the entirety of your loan. In most cases, however, you will likely have a few lenders funding you.

• How often do I have to make payments?

  As with many other types of loans, you typically have to make monthly payments.

• What if I want a business loan?

  If you need a business loan, start by reading our guide to peer-to-peer business lending. If you do decide to apply, you’ll need copies of recent business tax returns, business bank statements, details of existing loans and a detailed balance sheet. Your lender may require other documents, like a business plan, as well.

• Do I pay taxes on P2P lending?

  Not as a borrower. However, the IRS considers any returns as income and you’ll have to pay taxes as an investor.