Peer-to-Peer Lending: A Plain-Language Guide

What is peer-to-peer lending?

Peer-to-peer (P2P) lending is an online way for individuals to borrow and lend money directly, bypassing traditional banks and loan officers. Platforms match borrowers who need funds with investors willing to lend, often across a range of loan types.

How it works

• Borrowers apply on a platform, which assesses credit risk and presents loan listings.
• Lenders fund loans or portions of loans; returns come as interest over time.
• Platforms handle payments, collect repayments, and usually charge fees.

Who uses P2P lending

People seeking personal loans, small business owners, and investors looking for alternative income streams.

Benefits of P2P lending

• Potential for attractive returns relative to some traditional savings options (with corresponding risk).
• Portfolio diversification beyond cash, bonds, and stocks.
• Access to loan funding for borrowers who may face higher hurdles with traditional banks.

Risks and cautions

• Credit risk: borrowers may default on their loans.
• Platform risk: the operating platform could face financial or operational issues.
• Liquidity risk: funds may be tied up for the term of a loan or until a secondary market exists.
• Fees and information gaps: some platforms charge ongoing fees or provide limited performance data.
• Regulatory changes: policies can affect protections and returns.

How to choose a platform

• Review the platform's regulatory status and safety disclosures.
• Check how borrower risk is assessed and how loans are diversified across term lengths and credit grades.
• Understand fees, withdrawal options, and whether there is a secondary market for selling notes.
• Consider the typical loan terms and expected time horizon for your investment or funding needs.

Regulation and safety

Regulation varies by country. Some jurisdictions require platforms to publish risk disclosures, maintain consumer protections, and meet certain reporting standards. Look for clear terms, privacy safeguards, dispute resolution processes, and transparent performance data.

Takeaways

• P2P lending links borrowers with individual lenders via online platforms.
• It can offer diversification and potential returns, but involves credit risk and platform risk.
• Do thorough research on platform practices and understand the terms before participating.