How Does Peer-to-Peer Lending Work?

Written By Mary Beth Eastman
Last updated November 22, 2019

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cash representing same-day loans
December 20, 2018

Simple. Thrifty. Living.

Thanks to the Internet, investors and individuals in need of a loan can connect virtually using peer-to-peer lending. According to the U.S. Small Business Administration, peer-to-peer lending allows business owners to collect small investments from more than one investor to meet their needs. Lending websites such as Lending Club facilitate these loans. Like any loan, peer-to-peer lending has its benefits and drawbacks. Learn more about peer-to-peer lending and whether it’s right for your business.

The peer-to-peer lending experience includes two parties: individuals seeking a loan, which may be used for business or personal purposes, and accredited investors who are willing to offer small loans to invest in the business. As a result, most individuals seeking the loan will collect several small loans rather than one large one. For example, a small business owner might be seeking a $10,000 loan for new technology and collect ten $1,000 loans to cover those expenses.

Loans are not exclusively used for small businesses. Loans for personal use, such as purchasing a house or to pay for tuition, are also available.

The Loan Process

Peer-to-peer websites such as Lending Club (read our review here) allow individuals to complete an application for a loan, which can be reviewed by multiple lenders. The process begins with a soft check on your credit score to determine your rate. If your rate qualifies you for a loan, you will receive multiple loan styles to choose from. Once you choose the right loan, your application will be processed. Then the website will connect you with investors who want to provide a loan.

Peer-to-peer lending offers opportunities for individuals who many not be able to find a loan from a traditional financial institution. For instance, a small business in need of a loan to launch the business may not be able to secure a loan from a local bank, but an interested investor may choose to provide funding. Additionally, individuals can often secure these peer-to-peer loans more quickly. Some even offer financing in just days.

Peer-to-peer lending has some disadvantages as well. First, individuals are limited in the type of loans they can secure. Sites such as Lending Club offer loans that are smaller with shorter terms than traditional banks, according to the U.S. Small Business Administration. Interest rates on peer-to-peer loans are typically higher as well. That can mean that individuals or businesses that receive the loan will be paying more in the end. In addition, credit checks are stricter to secure these loans, so only individuals with good credit scores will receive them.

Peer-to-peer lending is a viable option for both individuals and businesses. Before exploring a site like Lending Club or Prosper, do the research and consider the advantages and disadvantages to determine whether it is a suitable fit for your needs. You can also examine the top online loan sites or the best business loans to make sure you’re getting exactly what you’re looking for.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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