A guide to peer-to-peer loans and how they work

There are many different types of personal loan can be used to cover essential expenses or life purchases. The most common options include unsecured personal loanswhich do not require any collateral, and are secured personal loans, which are backed by an asset such as a car or a house.

Peer-to-peer (P2P) loans, which allow individuals to borrow money without relying on a conventional financial institution, are perhaps a lesser-known option. These loans are made by investors and can provide many benefits, including easier to qualify and easier in terms of how to use the income.

What is a peer-to-peer loan?

A P2P loan is a loan made by one or more investors to individual borrowers. These transactions are usually facilitated through online platforms rather than traditional banks. Some of the most popular P2P platforms currently operating include Kiva, LendingClub, Upstart, and Prosper.

This type of unconventional loan started around 2005 when a fintech named Zopa launched what is considered the first P2P lending model, according to the industry website, BeyondP2P. Prosper and LendingClub soon followed suit.

Over the years, some of the P2P platforms have changed their lending model to include more than individual investors.

“As Kiva’s P2P lending platform has grown and proven effective, we have expanded our investment activities to go beyond P2P lending alone and include funding from institutional investors and individuals with high net worth through Kiva Capital, our asset manager supporting underserved communities,” said Kathy Si Guis, a vice president of Nicea non-profit that allows people to lend money to others.

How peer-to-peer loans work

Peer-to-peer loan agreements between borrowers and lenders are facilitated and operated by an intermediary such as a fintech platform. These platforms process applications and activate them through underwriting, collecting funds from investors lenders and then give the money to selected borrowers.

“These same intermediary companies will also collect the payments and distribute the profits to the investors,” said Michael Sullivan, personal financial consultant at the non-profit debt management and credit counseling agency, Governing America.

One of the main attractions of P2P loans is that the income can be used for anything, including home improvement, debt consolidation, and other major expenses. The uses for a P2P loan can even include paying for the cost of office equipment for a new business start-up or even supporting traditionally overlooked or marginalized borrowers.

“Kiva’s P2P loans often support people that the traditional financial sector often fails to reach, especially women, refugees and displaced populations, small farmers, and historically disadvantaged minorities here in the US,” Guis said.

Almost any type of loan request can be funded if the investments attractive to a particular lender.

How to apply for a peer-to-peer loan

The process of applying for a P2P loan is quite straightforward and not at all unlike applying for other types of lending or even lines of credit.

“The whole process is mostly online and simple,” Sullivan said. “It usually mirrors applying for a shop credit card.”

1. Research the options

The first step in applying for any type of loan should be to research your options and make sure you get the most competitive rate and loan terms possible.

“As with any financial transaction, the borrower’s first consideration is cost. Some lenders offer terms that include payment fees, but many require upfront fees of 1% to 8% or more,” Sullivan said.

It’s also important to make sure you’re working with a reputable lender. To make sure this is the case, research customer reviews for a lender or find their profile or rating on Better Business Bureau (BBB) ​​website.

2. Apply for pre-approval

Once you’ve identified a few P2P lenders you’re interested in working with, you can request pre-approval. This step will be followed by completing a full application to the specific P2P lending platform you wish to proceed with.

Submitting a full application can take anywhere from 20 to 30 minutes and usually involves providing various financial details, including income documentation, along with a breakdown of your monthly loan payments.

If you are looking for P2P funding for business-related needs, you may need to provide additional information. “If you need a P2P loan to start a business, then a detailed, thoughtful business plan will make your company and loan application stronger,” Guis said. “You also need to start thinking about your cash flows and how you’re going to repay a loan if you get one.”

3. Wait for investor funding offers

Once your application is approved, there may be a waiting period while potential investors review your request and decide if they want to participate in loan financing. The applicant can follow this to be given different loan offers from investors to check. The applicant can then choose one of the options to proceed with.

4. Acceptance of income

Once the loan is funded, the proceeds are transferred electronically to an account you designate.

Fees associated with P2P loans

As with any type of loan, there may be fees associated with P2P lending, and these should be factored into your payment budget. Some P2P loans include origination fees, and these can be as high as 8% of the loan amount.

“The fees were originally very large for most peer-to-peer loans because they represented the majority of the company’s revenue,” Sullivan said. “Interest rates are also typically higher than most traditional loans to provide an incentive for lenders to accept risk.”

However, not all P2P platforms charge borrowers a fee. Some do not charge any fees for home loan borrowers.

Advantages and disadvantages of peer-to-peer loans

As with any type of loan, there are benefits and drawbacks to consider before proceeding, including fees, repayment terms, interest ratesand so on.


  • It can be easier to get permission: Because P2P lenders take more than one credit profile or income considered, these loans can be easily obtained, even if you have low credit score. P2P loans provide a valuable option for often underserved populations.
  • More flexibility in how the funds are used: P2P loans can be used for almost any purpose, including helping to cover the costs associated with a small business and even small farming operations.


  • The approval and funding process may take longer: Because these loans are made by individual or institutional investors instead of traditional banks, the timeline between approval, funding, and depositing the proceeds into your account can be longer than with other types of loans. .
  • Not widely available: Although this style of loan was established years ago, there are only a few platforms that offer them.
  • Higher fees: Some P2P lenders may charge initial fees as high as 8% of the loan amount. Although this is not the case for everyone. Some P2P loans have no fees at all.

The takeaway

P2P loans offer an important financing alternative for important expenses, especially for individuals who may have trouble qualifying for traditional loans. These types of loans take more into account than your credit score. But a P2P loan may not be the best option if you need money quickly or you’re worried about paying high origination fees.

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