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Caveating this next guide to say I believe this investment idea to be super high risky. As always none of the guides are financial advice, they’re just a way to expose all the ways people invest their cash, so you can get inspiration and be ‘in the know’ on more low key and obscure investment opportunities.

With that, onto the topic of P2P lending. 

If you’ve been looking for ways to put your money to work, you’ve probably come across the term “peer-to-peer lending” or P2P lending. 

It sounds pretty futuristic, right? 

But at its core, it’s really simple: you lend money directly to other people or businesses, cutting out the middleman (a.k.a. banks). In return, you can earn interest - often much higher than what you’d get from a savings account. But, as with any investment, there are some risks to keep in mind. 

So let’s dive in and explore how P2P lending works and whether it could be a good fit for your financial goals.

I’ll cover:

• What is P2P lending and how it works
• Potential returns
• Types of P2P loans
• Upsides and downsides
• Big players in the P2P lending space
• How to choose a lending platform

What Is Peer-to-Peer Lending?

At its core, P2P lending is a platform-driven financial service that connects lenders (like you) with borrowers. Instead of applying for a loan through a bank, borrowers post their loan requests on a P2P platform, such as Funding Circle, LendingClub, or Zopa. 

As a lender, you can choose to fund a portion of these loans. Borrowers repay you with interest, usually in monthly installments.

And this is the interesting part: because you’re cutting out the middleman (banks), the returns for lenders can be significantly higher than those from traditional savings accounts.

As for the market size, it’s enormous, currently at $139 billion, with it forecast to reach over 1 trillion in 2033

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Potential Returns: Why Bother with P2P Lending?

One of the biggest reasons people get into P2P lending is the promise of attractive returns. 

While exact numbers depend on the platform and the level of risk you’re willing to take, average annual returns typically range from 4% to 10%.

For example:

• A low-risk borrower might give you a return of 4-5%.
• A higher-risk borrower could offer 8-10% or more.

This is leagues ahead of most high-street bank savings accounts, which often hover around 1-2% (if you’re lucky). However, higher returns come with - you guessed it - higher risks. More on that later.

Types of P2P Loans

Personal Loans
These are the bread and butter of P2P lending platforms. Borrowers often use them to consolidate debt, tackle home improvement projects, or cover other big-ticket expenses. Most platforms cap personal loans at around $35,000, which is plenty for most borrowers' needs. If you’re starting out as a lender, personal loans are a great way to diversify your portfolio since they’re the most common option.

Auto Loans
Surprisingly, most P2P platforms don’t label these specifically as “car loans.” Instead, borrowers simply take out a personal loan and use the funds to buy a car. The good news? The vehicle doesn’t need to be used as collateral, which makes this a low-risk option for borrowers who don’t want to tie their loan to their car. For lenders, it’s a practical way to fund loans with a clear purpose.

Business Loans
P2P lending platforms are a fantastic option for small business owners, as they often have more relaxed requirements than traditional banks. Borrowers don’t need mountains of paperwork, but they will need at least six months of business history to qualify—so this isn’t typically a resource for startups. Loan amounts can be significant, sometimes reaching up to $500,000, and are often backed by a general lien on the business.

Mortgages and Refinancing
Yes, P2P platforms even extend into the world of home loans, but with some caveats. They generally focus on owner-occupied properties, whether it’s a primary home or a second home. Borrowers will need to provide at least a 10% down payment, and mortgage insurance isn’t required, which is a big plus for many. The loan caps are high—up to $3 million on some platforms—making this an intriguing option for buyers looking for alternatives to traditional banks.

Student Loan Refinancing
Here’s where P2P lending gets creative. Borrowers can consolidate up to $500,000 in student loans from various lenders, but they’ll need solid credit and income to make it work. Some platforms also consider factors like the borrower’s career path and education, which helps lenders assess the likelihood of repayment. If you’re a lender, this area can be a way to support borrowers looking to simplify their financial situation.

Medical Loans
From dental work to fertility treatments and even weight-loss surgeries, P2P platforms are stepping in to help borrowers cover costs that typical insurance policies won’t. Loan amounts can go as high as $32,000, with repayment terms ranging from 2 to 7 years. For lenders, this category offers a chance to fund highly specific needs where borrowers often have a clear repayment plan.

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Upsides & Downsides

As with any other type of investment, there are upsides and downsides of which to be aware. In the case of P2P investing, the upsides include:

Upsides

✅ Low Barrier to Entry – A P2P portfolio can be created with a minimal amount of capital, making it one of the least costly forms of investing in which to participate. 

✅ Monthly Income – Investors are paid every month when borrowers make payments on their loans. This means a solid portfolio of P2P loans can generate a steady stream of passive income. 

✅ Higher Yields – Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields. A carefully curated portfolio of loans can potentially earn 10% annually or better. 

✅ Specific Control – Investors can determine the types of loans they’ll fund, as well as the term, credit score range and debt-to income ratio of borrowers with whom they are willing to work. Some platforms offer tools for automating this process, so an investor can set specific guidelines and turn their attention to other matters.

✅ IRA Friendliness – Some platforms offer lenders the capability of setting up a standard IRA, a Roth IRA or rolling over a 401(k). This offers tax advantages in that gains can be deposited directly into these accounts.  

✅ Loan Diversification – Investors have the option of funding entire loans or purchasing notes in increments as small as $25 each to spread risk across a variety of loans. 

Downsides

❌ Potential Defaults – the vast majority of P2P loans are unsecured. This means they have no collateral backing them. Further, these are loans to individuals. Your investment will evaporate if a borrower defaults, especially if it’s early in the term of the loan. 

❌ No FDIC Protection – Investors are not reimbursed by the Federal Deposit Insurance Corporation when P2P platforms fail. Nor does the FDIC cover investor losses if a borrower defaults. Some platforms do have agreements with other platforms to manage loan portfolios if they go out of business, but there are no guarantees. 

❌ Capital Depletion – Principal and interest payments on loans are recovered simultaneously. This is different from traditional securities in which the total amount of your original capital is returned at the end of the term. This places the onus on the investor to separate principal and interest as payments are made or reinvest the proceeds altogether. 

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3 big P2P lending Platforms

1. LendingClub

• Type of loans: Personal loans, small business loans, auto loan refinancing.
• Minimum investment: $1,000 for new accounts.
• Returns: Historically, 3%-8%, depending on the risk level of the loans you fund.
• Key features:some text
  • LendingClub was one of the pioneers of P2P lending in the U.S.
  • It primarily focuses on personal loans but also allows lenders to support small businesses.
  • Offers automated investing tools to diversify your portfolio easily.

Note: LendingClub transitioned into more of a digital bank in 2020, but existing investors can still manage their current loans.

2. Prosper

• Type of loans: Personal loans, debt consolidation, home improvement.
• Minimum investment: $25 per loan note.
• Returns: Average returns range from 3%-8%, depending on loan grades.
• Key features:some text
  • One of the original P2P platforms, Prosper remains a favorite for both lenders and borrowers.
  • The platform uses a grading system for borrowers, from AA (lowest risk) to HR (highest risk), allowing lenders to choose loans that fit their risk tolerance.
  • Offers a secondary market for trading notes, adding liquidity.

3. Funding Circle

• Type of loans: Small business loans.
• Minimum investment: Varies by state.
• Returns: Typically between 4%-8%.
• Key features:some text
  • Specializes in business loans, connecting lenders with small businesses seeking capital.
  • Borrowers are vetted thoroughly, making it a more secure option compared to platforms focused on personal loans.
  • Ideal if you’re passionate about supporting small businesses.

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How to choose a lending platform:

Here are some tips to help you pick the right platform:

1. Risk Tolerance: Check the borrower credit profiles and risk levels offered by the platform.
2. Minimum Investment: Some platforms let you start with as little as $25, while others require a higher initial investment.
3. Loan Types: Decide whether you want to lend to individuals (personal loans) or businesses (small business loans).
4. Automation Options: If you’re busy, look for platforms that offer automated investing to save time.
5. Platform Reputation: Ensure the platform is reputable and has safeguards in place, such as reserve funds to cover defaults.

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Hope this was helpful!

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Jason

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DISCLAIMER: None of this is financial advice. Finbrain is strictly for educational purposes.