What Is Peer to Peer Lending?

The Basics of Peer to Peer Lending

Peer to peer lending is often referred to as people to people lending. The lending occurs between two individuals instead of between an individual and a bank. Peer to Peer lending can be advantageous to both lenders and borrowers.

These loans are typically easier to qualify for than loans from a bank, though normally at higher interest rates. One main advantage to the lender is receiving a much better rate of return than they would get from simply depositing their money in a bank account.

Historically, peer to peer lending would take place between friends and members of one’s family. But you may have noticed several new opportunities online that exist to borrow money from or lend money to other people just like yourself. There are a number of sites online that serve to introduce lenders and borrowers.

As borrowing from conventional sources continues to be challenging, it’s only natural that other avenues, like peer to peer lending, have developed to address the excess demand for borrowing.

Advantages of Peer to Peer Lending for Borrowers

  1. Interest rate. While you should expect to pay slightly more than a bank would charge, the interest rates are usually quite good. Individual lenders don’t have the overhead that a company has to absorb.
  2. Credit flexibility. While many individual lenders only want to deal with those with a high credit score, there is something for everyone. While every bank might turn you away, there is someone out there that is willing to lend money to you. Some things to consider about credit and peer to peer lending:
  • Lenders may be willing to overlook your credit woes, especially if they’re due to circumstances outside of your control. But they’re far less likely to overlook the fact that you’re just lousy at paying your bills on time. Remember, these individuals are lending you their life savings; it’s really important that you make your payments on time.
  • You’ll have less privacy than you would normally have when dealing with a bank. Much of your financial information will be made available to potential lenders, so they can make informed decisions.

Advantages of Peer to Peer Lending for Lenders

  1. Interest rate. With banks paying less than 1% on savings accounts, individuals are finding that they can earn significantly more by lending to other people. While there is more risk and research required, many investors are finding that it’s worth it.
  2. More personal. Many lenders enjoy knowing that they are helping someone. In fact, it is customary that the lender knows just about everything there is to know about potential borrowers. Many people find this more satisfying than buying a bank CD.

Special Considerations for Lenders

Typically, your funds are not insured when loaning under peer to peer circumstances. Be careful not to be taken in by a hardship story. It is natural to want to help someone in need, but try to be objective and remember that your personal funds are at risk. As with any investment, you must analyze the amount of risk involved.

With the amount of work required to do an adequate job of screening loan seekers and making bids, a good index fund might do just as well over the long-term and require much less work.


Peer to peer lending is here to stay. The current version of lending to individuals is simply a natural evolution of this historical practice that has been going on for thousands of years. If you’re interested in becoming involved on either the borrowing or the lending side, there are many lending networks available on the Internet.

Borrowers need to remember that they are borrowing money from an individual, and the failure to make payments on time affects that person directly. Lenders need to stay focused on making wise decisions with regard to risk management. Not everyone is a good risk.

Please remember these tips and precautions. You might find that peer to peer lending is just the solution for which you have searching!

Author: Dr. James Hans

Dr. James Hans is a personal finance expert, who has dedicated his life to providing financial education in the areas of personal finance and investing.

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