What Is Peer-to-Peer Lending?

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What Is Peer-to-Peer Lending?

Peer-to-peer (P2P) lending is the lending of money that occurs directly between parties without the involvement of a traditional financial institution. As such, it is very old and rather common. Its modern form was made possible by the Internet, and it has evolved to become a business activity of its own, with a profit motive.

Its modern form

Peer-to-peer lending as we know it arose when many individuals (and some businesses) found themselves unable to get credit from banks and other financial institutions during the financial downturn that began in 2007. Using the Internet, some responded to the demand by setting up sites through which borrowers and lenders could work together to make loans.

Why do people use it?

People borrow money from peers for the same reasons that they borrow it from traditional institutions: to get mortgages, business loans, or education loans; to consolidate debts, etc. Lenders lend for a variety of reasons, such as the chance to get high earnings. Borrowers and lenders aren’t just individuals; there are businesses and institutional investors that engage in P2P as well.

The typical amount of money borrowed varies greatly, but most loans are very small.

The lack of a middleman (intermediary) means that there is lower overhead than would be with a traditional financial institution. There are fewer servicing costs and other expenses.

Roles of the Internet and social media

The Internet has made it easier to match lenders and borrowers. Many sites have sprung up to cater to the supply and demand for these private loans.

Some peer lending takes advantage of social networks, whether online or not, with the idea that familiarity can lower the risk of defaulting on a loan. Loans made to family and friends are less likely to be done through a professional intermediary, and they have more wiggle room when it comes to interest rates and repayment terms.