Peer-to-Peer Lending

Full definition

P2P lending platforms emerged in the mid-2000s as a way to match borrowers who struggled with bank credit to investors seeking higher yields than savings accounts offered. Platforms like LendingClub and Prosper pioneered the model in the U.S. How it works: A borrower applies online. The platform assesses creditworthiness using traditional credit data and proprietary models, assigns a risk grade, and lists the loan on its platform. Investors (individuals or institutions) review listings and fund loans in whole or in fractional shares. Once fully funded, the platform disburses the loan to the borrower. Monthly payments flow back to investors minus a servicing fee. Evolution of the model: Most major P2P platforms have shifted toward institutional funding (banks, hedge funds, pension funds) rather than pure individual investor funding. The result is faster funding times and more consistent pricing, but the peer element is largely a historical label rather than an accurate description of most modern transactions. For borrowers: Rates and terms are comparable to online lenders. Approval criteria vary widely by platform. Some P2P platforms specialize in near-prime or fair-credit borrowers who cannot qualify at traditional banks. Application and approval are fully online; funding typically takes 3-5 business days. For investors: Returns vary by risk grade, typically 3-8% net of defaults and fees on higher-grade loans and higher on lower-grade loans. P2P investing carries default risk, platform risk (if the platform fails), and illiquidity risk (loans cannot easily be sold before maturity). Regulatory note: P2P platforms are regulated as securities offerings (investor side) and consumer lenders (borrower side). They must be licensed as lenders in states where they operate.

• Online lender
• Marketplace lender
• Origination fee