P2P Loan

P2P loan summary: 

• Peer-to-peer loans are made between individuals without involving banks or traditional lenders.

• P2P loans may offer better terms or more flexible approvals than traditional loans.

• There are a limited number of peer-to-peer lending platforms in the U.S. 

P2P loan definition and meaning

P2P stands for peer-to-peer, and involves getting a loan from your peers—other individuals—rather than a bank or financial institution. P2P loans are usually made through online platforms designed to directly connect people who want to borrow money with people who want to lend money. P2P loans often appeal to borrowers who want better terms or may struggle to get approved for a traditional loan. 

P2P loans are often unsecured loans, made to individuals or small businesses. Some can be secured with collateral, such as property. Borrowers may be able to get lower rates, faster approvals, or flexible terms by using a P2P platform. Be aware that borrowers and lenders using P2P platforms may not have the same consumer protections as they would with a traditional loan.

Key concept: A person lends money to another person, usually through an online platform, bypassing traditional financial institutions like banks.

More on P2P loans

P2P lending first emerged around 20 years ago, and it was popular for a time. The trend didn't last long, however, and there are a limited number of peer-to-peer lenders that still operate in the U.S.. Regulatory difficulties are partly responsible for the decline, but companies have also found other ways to finance loans and P2P lenders have altered their product offerings. 

P2P loans: a comprehensive breakdown

P2P loans typically work the same as other installment loans, with a set monthly payment that you make each month until the loan is paid off. The difference is that you don't go to a lender like a bank; instead, you use a lending platform that connects you with individuals who want to lend money. The P2P platform handles the transfer of loan funds and ongoing payments.

Processes can vary, but the platform usually reviews a borrower's application before offering an interest rate and then sharing the details with potential lenders. There may be a soft credit check in the initial phase, and the platform will likely carry out a hard credit check before your loan is finalized. This could ding your credit score.

Here are some other things for borrowers to consider:

• Platform reputation. If you're considering a P2P loan, look for a platform with a solid track record that is licensed to operate in your state. Read reviews from actual users and look into the platform's customer service reputation.

• Fees and rates. Some P2P loans have high origination and maintenance fees. Look at the APR, which is the annual cost of the loan including interest and fees, as well as the total cost of the loan when comparing offers. 

• How much you want to borrow. How much you can borrow with a P2P loan can vary based on your qualifications. Check that the loan terms and amounts match your needs before you choose a loan offer. 

• Repayment plan. Make sure you have a plan to repay your P2P loan before you sign the dotted line. A P2P loan could have as much impact on your credit as any other loan. If you stop making payments, the loan could be reported as delinquent to the credit bureaus, which could really hurt your credit scores.

P2P loans are similar to personal loans in that they can be used for many purposes, including debt consolidation, home improvements, medical expenses, and education. There’s no guarantee that a peer-to-peer lender will give you the lowest rate.  Always compare offers from a variety of loan sources to look for the best terms.

Real-life example of a P2P loan

When her car’s transmission failed, Rachel needed a quick $6,000 for repairs. Her credit card had a high interest rate, and she didn’t want to take on even more expensive debt. She applied for a P2P loan through an online lending platform that connects borrowers directly with individual investors.

Within a few days, her application was reviewed, and several investors each agreed to fund small portions of her loan. The platform combined those contributions into one $6,000 loan for Rachel at a fixed interest rate of 10%—much lower than her credit card’s 24% APR.

Rachel makes one monthly payment to the platform, which then distributes it to the investors who funded her loan. The process feels more personal and transparent, which Rachel likes. And in return for helping her out, the investors earn interest.

However, Rachel knows that if she misses payments, the platform will report it to credit bureaus just like a bank would. She treats it as seriously as any other loan, and over time, paying it down on schedule helps improve her credit score.