What Is Peer-to-Peer Lending?

What Is Peer-to-Peer Lending?

Peer-to-peer lending is an alternative to institutional lending in which individuals borrow and lend money via an online platform. Peer-to-peer lending arose in the late 2000s, after a credit crisis prompted many traditional lending institutions to tighten lending standards. This made it necessary for some potential borrowers to look elsewhere for loans, and a number of P2P providers emerged to fill the void.

As of 2025, many of those platforms have modified their business models, leaving few true P2P providers. For instance, SoFi and Lending Club converted to banks and closed their peer-to-peer investment platforms, and Upstart became an AI-powered tool for pairing borrowers with traditional lenders. Prosper is one original P2P provider that continues to match individual borrowers and lenders.

How Does Peer-to-Peer Lending Work?

P2P loans are made available through online platforms that pair potential borrowers with investors willing to issue loans. Borrowers and investors do not deal with each other directly; the P2P platform handles transaction details, including determining loan eligibility, setting interest rates and fees and collecting payments.

If you're a borrower, the process is somewhat similar to applying for other types of personal loans:

1. Preapproval: The P2P loan application process typically only takes a few minutes, which makes it easy to shop around for the best deal. Peer-to-peer preapproval screenings, which generate offers including loan amount and interest rates, use soft inquiries to check your credit report. A soft inquiry does not affect your credit scores.
2. Final approval: If you accept a P2P loan offer, the lender will likely make a hard inquiry on your credit report before you get final approval. This is comparable to the application process many lenders use and could affect your credit score slightly. The lender also may ask you to verify your income and to provide additional background information.
3. Receive funds and begin making payments: A P2P lender may take several days to finalize its decision. If you get final approval, you'll likely be instructed to share your bank account credentials for receiving the loan amount as an electronic deposit and for use in making monthly electronic payments. Loan funds can appear in your bank account within a few days.

P2P Loan Fees

The types and potential range of fees on P2P loans are comparable to those on traditional personal loans. Prosper charges origination fees of 1% to 9.99% of the loan amount depending on your credit evaluation. That fee is deducted from the lump-sum deposit you receive when the loan is issued. Unlike most traditional lenders, Prosper may refund part of that origination fee if you pay off your loan ahead of schedule.

Example: If you borrow $5,000 and the origination fee is 5%, or $250, you'll receive $4,750 when the loan is issued, but your payments and interest charges will be based on the full $5,000 loan amount.

Other fees common to both P2P loans and traditional loans include late payment fees and insufficient funds fees (if a scheduled payment fails to go through).

Learn more: How to Invest in Peer-to-Peer Lending

Peer-to-Peer Loans vs. Traditional Loans

The main appeal for P2P borrowers is getting easier approval and lower interest rates than are typically available through traditional lenders like banks or credit unions. There are other differences between P2P platforms and traditional lenders as well:

^*Prosper issues secured home equity loans and home equity lines of credit in some states, but those products are funded by a bank, not peer-to-peer investors.

Pros and Cons of Peer-to-Peer Lending

For both borrowers and investors, the peer-to-peer model has advantages and drawbacks.

Is Peer-to-Peer Lending Safe?

While not unsafe, peer-to-peer lending does pose some additional risk for both borrowers and investors when compared with traditional financial institutions. In both cases, this extra risk concerns the possibility of loan default—a borrower's inability or refusal to repay what they owe.

For investors in a P2P platform, the risk around default is straightforward: If a borrower they've helped to fund fails to keep up with payments, the return on investment can be less than anticipated. The specifics of how that lower return is handled depends on the platform's policies and procedures, but investors in P2P platforms must assume that risk.

For borrowers, late payments on a P2P loan could trigger serious credit consequences more quickly than you'd find with a traditional lender. Banks and credit unions typically forward delinquent accounts to collection departments or agencies after 90 days of attempting to get your payments back on track, but P2P lenders may initiate collections as soon as one day after you've missed a payment. Collections appear on your credit reports and can have serious negative effects on your credit scores.

How to Get a Peer-to-Peer Loan

If you're considering P2P platforms, these guidelines can help you make a wise decision:

• Research lenders in your state. As with more traditional financial institutions, not all P2P lenders operate in all states, and some may have policies that differ within states where they do operate. You can find that information in fine print that typically appears on the bottom of their websites' homepages.
• Understand the loan details. Homepage fine print also typically spells out a given provider's policies and procedures, including the range of loan amounts they offer, interest rates and fees. This language also typically includes disclaimers that spell out risks inherent in borrowing or lending via the platform.
• Know your credit situation. Review your credit reports and look out for any major negative entries. Accounts in collections and recent late payments could hurt your approval chances, even if you meet credit score requirements.
• Borrow only what you need. If your credit history makes you eligible to borrow more than the loan amount you request, a P2P platform may suggest increasing your loan amount. That's fine if you need the money and can afford a higher payment, but if you don't have a specific use in mind for the funds, you could end up paying interest on more loan than you really need.

The Bottom Line

Peer-to-peer lending platforms make it extremely easy to shop for loan offers, and qualifying borrowers can expect interest rates and fees that compare favorably with those of traditional lenders. It can offer investors better returns than typical deposit accounts, but with potential risks of borrower default. If you're considering a personal loan through a P2P provider (or a traditional institution), checking your FICO^® Score^Θ for free with Experian can help you understand your credit standing.