What is Peer-to-Peer Lending?

According to the Small Business Administration, peer-to-peer lending (aka P2P lending), is a way consumers and small businesses can access capital via the internet. Peer-to-peer lending is almost like taking a loan out from the bank, except that your bank is one of your peers. So instead of a credit union or big bank lending you money, it could be your neighbor, Seth, Claire, or any other individual or institutional investor.

p2p lending


P2P lending enables borrowers to access moderate capital to fund their business launch, consolidate their debt, or fix up their house, among other things, while individual investors can earn money through interest on the loans that they fund.

How Peer-to-Peer Lending Works

Now that you get the gist of peer-to-peer lending, let’s go over how P2P lending actually happens:

Whether you intend to lend or borrow money through a peer-to-peer lender, you’ll need to start with a lending platform, such as UpStart, Funding Circle, Prosper, or Lending Club. These platforms are where borrowers and lenders are partnered up so that they can create loan agreements.

If you’re an investor, you can choose which types of loans you want to invest in, like business or personal loans, for example. Additionally, investors can generally choose the amount of risk they’re willing to accept, as well as determine the timeline that they want to lend. Keep in mind, lending platforms each have their own qualifications for who can and can’t invest in loans through their marketplace, so you’ll have to be approved as an investor before you can start investing money in your peers.

If you’d like to open up a loan with a peer-to-peer lender, you’ll need to go through an application process provided by the lending platform of your choice. Each one works a little differently, but most include credit checks.

From there, you’ll either be approved or denied a loan. If you are approved, you’ll be presented with financing offers from different investors who may agree to fund your loan. Sometimes it can be a single investor, while other times, multiple investors will fund your loan, in which case, your loan payments and interest will be divided up among them.

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