At a Glance

During your search for a loan, you may have come across the phrase peer-to-peer lending in the past. This relatively new form of lending differs from other forms of financing in that the middleman is completely cut out. Let’s dive a little into this unique form of debt financing.

What is peer-to-peer lending?

For those unfamiliar with the term, peer-to-peer lending is a form of debt financing that has only been officially around since roughly 2005. In short, it connects potential borrowers directly with private lenders online and removes the traditional financial institution as the middleman. Borrowers apply directly for a loan via a peer-to-peer lending investment online site, where an investor can choose to fund a portion of the total of the loan.

How does peer-to-peer lending work?

As mentioned, peer-to-peer lending platforms directly connect borrowers and lenders, but there are some finer details involved in this process worth explaining:

1. Who’s lending the money?

When you apply to a P2P lending site, it will be visible to all potential investors who are looking to grow their money through the interest they charge. It’s possible to have multiple people funding your single loan, as a private investor isn’t required to fund the total sum you request. Due to this, peer-to-peer loans can have slightly different payments per month when broken down by an investor.

2. Why would others finance money to people who they don’t know?

In short, private lenders view your application and loan as an investment opportunity. As you pay back the loan amount, you will also be paying an established interest rate on top of each monthly payment. That interest can accumulate for an investor in a similar way to an investing account with stocks, bonds, or other securities, albeit with more risk for the lender.

3. How much can you borrow using this method?

The loan amount you can borrow when looking to lend peer-to-peer can vary depending on the site you are using but sums up to $40,000 are not unheard of.

4. What are the interest rates?

In general, interest rates on peer-to-peer loans are higher than that of other debt financing methods. However, with a strong enough credit score, you may qualify for an interest rate around 6-8%, but the median interest rate offered is closer to 15%.

5. How do you repay a P2P loan?

Typically, a P2P loan is repaid on the same site you borrow from by using your login information. Each month you will be responsible for a payment that encompasses a portion of the principal, any interest, as well as any potential fees.

What can I use peer-to-peer loans for?

As with many other types of personal loans, a peer-to-peer lender will often ask what the intended purpose of the loan is. With that said, there is usually no strict requirement for most cases, and their inquiry is simply for informational purposes. Home improvement, medical expenses, and major household purchases are common examples of uses.

Many people often wonder if peer-to-peer lending is legal or is peer-to-peer lending safe, with yes being the answer to both. Therefore, you cannot use peer-to-peer loans for any illegal means.

Pros and cons of peer-to-peer lending

Every type of debt financing has a slew of pros and cons, with peer-to-peer lending companies being no exception:

Pros of P2P lending:

  • You have the flexibility to use the loan for virtually whatever you need.
  • Quick turnaround time from application to decision.
  • Higher likelihood of flexibility on required application criteria.

Cons of P2P lending:

  • Higher interest rates than financial institutions may be provided without strong credit.
  • Additionally, fees, such as collection fees, can quickly add up.
  • Inherent higher risk as a lender.

When should I consider peer-to-peer loans?

There are a multitude of debt financing strategies a person can use with the correct option varying from personal situation to personal situation. However, some indications a peer-to-peer loan may be a viable option include:

  • You have been denied a traditional loan in the past (though, watch for a higher interest rate).
  • Quick turnaround time on the decision process.
  • Convenience of the repayment method and online platform.

Alternatives of peer-to-peer loans

Peer-to-peer loans are not right for everybody and, as such, there are alternatives available:

1. Personal loan

Peer to peer lending bad credit offers may not work for your specific situation, but a standard personal loan might. Working very similarly to a p2p loan, a normal personal loan is offered by a bank, online lender, or credit union and can provide you with the funds you seek. However, there are usually stricter application requirements.

Related: Find and Compare Personal Loans Fast | Credello

2. Business loan

If you are a business owner who is seeking financing, a business loan may be a better alternative. These loans are intended specifically for business purposes and can be repaid using business, rather than personal, funds.

3. Student loan

In some cases, a traditional student loan may offer you a better interest rate in the long run than that offered by peer-to-peer investors. To borrow money from lenders generally means to incur interest, but specific loans for students will often have a lower interest rate as they take your personal situation as a student into account.

What should I consider before applying for a P2P loan?

When wondering is peer to peer lending a good idea for your personal and financial situations, there are a few factors to consider. Ask yourself questions such as:

  • Can I pay this loan back in full and on-time every month?
  • What fees are associated with this loan?
  • What is the interest rate I am being offered? How does it compare to industry standard for my credit score?
  • Are there any penalties for paying the loan off quicker?
  • Are there more specific loans for my use purpose?

Asking yourself these questions will start to help you determine if seeking out private individuals that loan money is truly the best course of action for you. Peer to peer lending companies are useful for some, but not for others.

How to qualify for P2P loans

Assuming you believe a peer-to-peer lender is right for you, the next step will be to see if you qualify for a loan. Consider your credit score and conduct research on what interest rates you will likely be offered at your current level. You will also need to provide some proof of steady income to show you can repay a loan, as well as demonstrate a positive history with credit. Many sites may also allow you to check and see if you prequalify for any loan offers without conducting a hard pull on your credit.

How to borrow money

Once determining that you qualify for a loan, there are a few steps you need to follow to apply:

  1. Add up the total amount you will need to request for the loan based on the purpose.
  2. Gather personal and financial information that will be necessary for the application (current address, income streams, etc.).
  3. Submit application and compare different offers from lenders.
  4. Select offers that amount to the total of the loan.
  5. Begin repayments.

Reasons for loan not being approved

There are a variety of factors that can cause a loan to not be approved. One of the most common reasons is a credit score that is too low. Not submitting all the required information on an application, refusing to pay any fees outlined for the loan, and a lack of verifiable income are all also common examples.

What should you do if your loan isn’t approved?

Your next steps after a loan application being denied will vary depending on what the reason was. First and foremost, if the rejection was due to your credit score then you should begin to work on lifting your score up. Practice on-time payments with any existing debt or ask a trusted individual if they will let you be listed as an authorized user on their credit card.

Assuming you have no verifiable income, gather any documents that were cited as not being present or secure a job first. If the fees were an issue, consider alternatives to P2P loans that don’t typically charge a fee.


Depending on your financial and personal situation, peer-to-peer lending can be a good idea. Evaluate what you need the funds for, your credit score, and offerings you are provided with to determine whether a peer-to-peer lending loan is in your best interest.

Using a credible site, peer to peer lending is indeed safe. It’s worth noting that you may not receive a favorable interest rate and there may be extra fees associated with this form of debt financing, but it is both safe and legal as a borrower.

Yes, peer-to-peer lending is legally classified as an investing strategy for lenders and is legal.

While some peer-to-peer lenders may offer a loan with no credit check, the interest rate and terms of the loan offered to you will almost always not be favorable.

Yes, there are P2P loans for those with bad credit, but you may be charged an interest rate above 30% depending on your credit. In this situation, a P2P loan would not be a good choice.

Assuming you make all required payments on time and in-full, then no, borrowing money from peer-to-peer lenders will not hurt your credit. However, if you begin to miss payments then your credit score will be impacted negatively.