A Guide to P2P Lending

Peer-to-peer, or P2P lending, has created a financial revolution over the last several years by eliminating the middleman in loan transactions.

What is peer-to-peer lending?

Peer-to-peer lending is when an individual investor or an institutional investor provides debt financing to individuals or businesses through online services (typically a website). P2P lending matches lenders with borrowers who need cash quickly. It’s known as marketplace lending or alternative financing because it’s a method outside of the traditional business lending practice.

Who benefits from peer-to-peer lending?

Both the borrower and the lender can benefit from peer-to-peer loans. The lender’s benefit is that they create a steady income from interest payments, which often exceed earnings from traditional means like CDs, saving accounts, and money market funds.

On the borrower’s side, while the amount of interest charged for peer-to-peer loans may be higher than traditional bank loans, the terms are likely to be more flexible. The online application process is usually fast and convenient.

P2P loan types

P2P loans started as personal unsecured loans but now include business loans as well. With a personal P2P loan, you can borrow for any legal purpose, and you don’t have to pledge collateral to get approved for a loan.

Personal loans are the most common P2P loans, and they’re also the most flexible. You can funnel the money toward debt consolidation, a new car, home improvements, or starting a business.

P2P business loans can also include business auto loans, business loans for real estate, or covering a short-term cash crunch. Small businesses and startups tend to utilize P2P loans the most.

Advantages of P2P lending

Peer-to-peer loans match investors and borrowers.

With peer-to-peer lending, borrowers don’t apply to a bank or other traditional financial institution. Instead, they create a profile on a website that acts as a loan application. Investors then review the online profiles, and if they like what they see, they offer a loan to the applicants.

Borrowers have a choice of loans.

Borrowers aren’t required to take out any of the loans they are offered. Rather, they can review the terms and interest rates created by various investors, and they can determine which one they prefer. If they don’t see a loan that works for them, they don’t have to take one. In the P2P lending world, this is referred to as the auction process.

Credit scores and debt-to-income ratio are factors.

If you decide to apply for a peer-to-peer loan, the P2P lending platform creates a profile for you, including information about your credit score and debt-to-income ratio. Every P2P lender does this a little differently. For example, some lenders may show applicants’ credit scores, while others may assign A, B, or C ratings to borrowers. Don’t worry: Although profiles are public so that investors can see them, they don’t contain your real name, ensuring your privacy and security.

Disadvantages of P2P lending

P2P lending platforms sometimes look beyond credit scores.

While credit scores play a big role, lenders and lending institutions are also interested in why you need a loan. This part of the application can be critical to attracting a lender or investor. An investor who sees an enticing application may be more likely offer a loan to that applicant than to one who doesn’t clearly define the purpose for the loan, even if the second applicant has a better credit rating.

The application process is often longer than some loans.

Applying for a peer-to-peer loan is arguably faster than applying for a business loan through a bank, especially because borrowers don’t have to create lengthy business plans. However, P2P applications take longer than applying for loans from online lenders and applying for a credit card online.

Approval and funding times can vary.

With many online lenders and online credit card applications, a decision can be rendered in just a matter of seconds. For online loans, in particular, funding can happen the same day or the next business day. With peer-to-peer loans, approval and funding times vary. Because borrowers have to wait until an investor becomes interested in their profiles, the process can take anywhere from a few minutes, a few days, to a few weeks.

Investors receive better rates but less security.

Investors who want to put their funds into peer-to-peer platforms have the opportunity to earn interest. In most cases, the nominal return rate exceeds savings accounts, money market accounts, and Treasury Bonds. However, if you lend money over a P2P site, your investment isn’t guaranteed with these other investment methods.

Now that you understand the basics about peer-to-peer loans, let’s look at a few things you should know.

Things to keep in mind when looking for a P2P loan

  • It’s important to realize that a peer-to-peer loan is a real loan. Some borrowers wrongly assume that, since a P2P loan isn’t a traditional loan and doesn’t come from a bank or other traditional lender, it’s not an actual loan. Many assume it doesn’t have the same kind of penalties. This couldn’t be further from the truth. Legally, a P2P loan is the same as a bank loan. Not to mention that the primary peer-to-peer lending sites are highly regulated by the SEC and at the state level.


  • Make certain that peer-to-peer lending is available in your state. Lenders are regulated at both the state and federal levels. Although additional states have legalized peer-to-peer lending, not every state allows every platform.


  • Be aware of the fees. As you know, loans have more internal costs than just the interest rate. Many borrowers have been fooled by a very low-interest rate combined with high loan fees. Fees for peer-to-peer loans are often high to support the platform’s development and infrastructure. Of course, the worse your credit rating with the lender, the higher the fee charged by peer-to-peer lender platforms. Many times, the fees are deducted from the loan amount.

How to get a P2P loan

If you’re ready to get a peer-to-peer loan, here are the steps you’ll need to take.

  1. Prequalify for the loan

P2P marketplaces require prospective borrowers to complete pre-qualification screenings to see which lenders they’re eligible to borrow from. You’ll need to provide your current credit score, along with other pieces of information.

  1. Shop around for a P2P lender

You can prequalify with as many P2P companies as you’d like without hurting your credit score. When you’re evaluating potential lenders, look out for lending requirements, fees, repayment terms, loan amounts, and interest rates.

  1. Complete your application and get your funds

Once you’ve found your peer-to-peer marketplace, it’s time to create an account, complete your application, and, if approved, review your terms.

Once approved, your loan will go into the funding stage. This is when investors review your loan request to see if they’d like to lend to you. You may have several investors interested in funding your loan at once.

After your loan is funded, you’ll receive your money and a monthly payment schedule. Rather than making monthly payments to each individual investor, you’ll make a single payment through the marketplace.

What if a P2P loan isn’t right for you?

There can be times when traditional bank loans or P2P loans aren’t the best option because of the time involved with obtaining the fund. Whatever the reason, a small business loan might be the right form of funding for your business. There are many funding options through alternative lenders online like Kabbage.

Four main kinds of alternative financing:

  • A term loan is a lump sum you borrow and repay over a term of four or five years based on set terms, including the annual percentage rate.
  • A line of credit (LOC) gives you access to a specific amount of funds that you can use when necessary. This is generally used by businesses that need short-term financing to bridge cash-flow gaps.
  • Invoice factoring, also known as invoice financing or accounts receivable financing, is an option for small businesses that deal with unpaid invoices. Instead of waiting to be paid, you can get an advance on those invoices, which you then pay back along with a fee when your customers settle their accounts.
  • Merchant cash advances offer a way to get an advance on future credit card or debit card sales.

Kabbage is an option many small business owners leverage because it’s free to apply without using the approved funds. Approvals are fast, typically in a day or two, because they look at more than your credit report and consider many factors. This makes it a particularly good option for a business in need of small business loans, even for those with less than perfect credit that can’t obtain traditional loans.

Have questions about how to choose a business checking account? Check out our FAQs on this topic.


Is peer-to-peer lending safe for a borrower?

Yes, it is. P2P loans are highly regulated by the SEC. They aren’t very different from getting a bank loan. The biggest difference is that a P2P loan is always an unsecured loan, meaning you don’t need to provide collateral, whereas a bank loan can be an unsecured or a secured loan.

Is peer-to-peer lending short-term or long-term?

P2P loans usually run between three and five years.

What can you use a P2P loan for in your small business?

P2P loans can be used for all kinds of reasons: debt consolidation, starting a business, business loans, mortgages and refinancing, consolidation loans, and more.

Want to dig deeper?