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Peer to Peer Lending: Overview, Characteristics, History, Rates of Interest, Working

Individuals can get loans directly from other individuals through peer-to-peer lending, bypassing the financial institution as a middleman. P2P lending websites have significantly boosted its use as a form of alternative funding.
Additionally, P2P lending is referred to as “social lending” or “crowdlending.” Although it has only been around since 2005, it already faces competition from Prosper, Lending Club, Upstart, and StreetShares.

Peer-to-peer Lending: An Overview

Websites that facilitate peer-to-peer lending connect borrowers directly with investors. Each website establishes the pricing and terms of the transaction and facilitates the transaction. The majority of websites offer a range of interest rates based on the applicant’s creditworthiness.

Peer to Peer Lending

To begin, an investor creates an account with the site and deposits funds to be distributed as loans. The loan application submits a financial profile that is classified as risky, which affects the interest rate the applicant will pay. The loan applicant may study and accept one or more proposals. (Some applicants compartmentalise their requirements and accept numerous offers.) The platform handles both the money transfer and the monthly payments. The procedure can be completely automated, or lenders and borrowers can bargain.

How Peer-to-peer Lending Evolved

Initially, the P2P lending system was viewed as a way to provide credit to those who would otherwise be denied by traditional lenders or as a way to consolidate student loan debt at a more advantageous interest rate. However, P2P lending platforms have grown in popularity in recent years. The majority now cater to clients looking to consolidate credit card debt at a cheaper interest rate. Additionally, home improvement loans and auto financing are increasingly available through P2P lending platforms.

Rates for applicants with good credit are frequently lower than equivalent bank rates, however, rates for applicants with questionable credit histories might be significantly higher. As of December 2019, offers personal loan rates ranging from 10.19 per cent to 24.98 per cent. 1 As of February 2020, Peerform reported loan rates ranging from 5.99 per cent to 29.99 per cent. 2 According to, the average credit card interest rate was 17.30 per cent as of Feb. 5, 2020.

For lenders, peer-to-peer lending provides an opportunity to earn interest on their funds at a rate higher than that offered by traditional savings accounts or certificates of deposit (CDs).

Particular Considerations

Individuals considering investing in a P2P lending site, as well as conventional institutions, should be concerned about default rates. According to the Financial Times, Zopa had a 4.52 percent default rate on loans provided in 2017, with rival sites expecting similar default percentages. From April 2015 to December 2019, an S&P/Experian composite indicator of default rates across all categories of lending to US borrowers fluctuated between around 0.8 per cent and 1%. 3 Credit card debt default rates in the United States swing far more, reaching a high of 9.1 per cent in April 2015 and falling to 3.56 percent in mid-2018, according to Market Watch.

Any consumer or investor considering using a peer-to-peer lending platform should inquire about transaction fees. Each website earns money in its own unique way, however fees and commissions may be levied to either the lender or the borrower, or both. As with banks, the sites may impose loan origination fees, late fees, and costs for failed payments.

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Peer to Peer Lending

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Peer-to-peer lending does not neatly fit into any of the three classic categories of financial institutions – deposit takers, investors, or insurers – and is therefore occasionally classified as an alternative financial service.

Peer-to-peer Lending Is Characterised by the Following Characteristics

  • It is occasionally undertaken for profit; there is no requirement for lenders and borrowers to have a common link or prior relationship;
  • a peer-to-peer lending organisation acts as an intermediary; transactions take place online;
  • Lenders frequently choose which borrowers to invest in, if the P2P platform allows for this; loans can be unsecured or secured and are typically not insured by the government; loans are securities that can be transferred to others for debt collection or profit, though not all P2P platforms allow for this, and costs can be very high, tens of percent of the amount sold, or nil.
  • Disintermediation and reliance on social networks were also early characteristics of peer-to-peer lending, but these characteristics have begun to fade. While it is still true that the internet and e-commerce enable the abolition of traditional financial intermediaries and that individuals are less inclined to default to members of their own social circles, the introduction of new intermediaries has shown to be time and cost effective. [reference required] Extending crowdsourcing to previously unknown lenders and borrowers creates new possibilities.


Kingdom of the United

Zopa was the first peer-to-peer lending company in the United Kingdom, having been formed in February 2005.

Funding Circle was founded in August 2010 and quickly established itself as the first significant peer-to-business lender, offering small firms loans from investors via the platform. Funding Circle has originated loans totaling more than £6.3 billion. In 2011, Quakle, a peer-to-peer lender created in 2010 in the United Kingdom, shut down with a near-100 percent default rate after attempting to gauge a borrower’s creditworthiness using a group score similar to eBay feedback scores; the approach failed to incentivize repayment.

Peer to Peer Lending

In 2012, the UK government funded £20 million via peer to peer lenders in British firms. In 2014, a second £40 million investment was announced. [20] The objective was to circumvent high street banks, which were unwilling to lend to smaller businesses. This measure has been criticised for stifling competition in the United Kingdom by focusing financial assistance on the larger platforms.

Advantages and Disadvantages

Rates of Interest

One of the primary benefits of person-to-person lending for borrowers is that rates can occasionally be lower than those offered by traditional banks.

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For lenders, the benefits may include larger returns than those available through savings accounts or other investments, but at the risk of loss, as opposed to savings accounts.  Interest rates and the mechanism used to calculate them vary significantly amongst peer-to-peer lending sites. Interest rates may also be less volatile than other sorts of investments.

The Growth of Digital Lending

According to S&P Global, “major fintech players have raised significant cash and expanded their financial services product lines and features in order to further entrench clients and grow market share and profitability.”

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Fintech startups in the United States raised almost $7.5 billion in venture capital funding across 194 transactions in the second quarter of 2021, an increase of about 70% year over year.

What Is Peer-to-peer Lending and How Does It Work?

Peer-to-peer financing connects lenders and potential borrowers using web software.

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While features differ by platform, there are numerous similarities. LendingClub, Prosper, and Peerform are all examples of peer-to-peer lenders.


Peer-to-peer lending may appear to be an appealing financial opportunity – you can earn great returns on your investments without using a bank.
However, keep in mind that if you lend money using a P2P network and the borrower defaults on the loan, you may not be reimbursed. Your P2P investments are not guaranteed by the FDIC.

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