P2P lending (peer-to-peer lending) is a type of platform that allows participants to borrow and lend sums of money without having to rely on a conventional financial institution to control transactions. Also known as crowdlending or social lending, such a system connects borrowers and lenders directly, usually through a website or an app.

How are does P2P lending work?

Loan applicants and investors conduct P2P loans using a P2P platform, which is typically a website or app that manages the relationship between the two parties.

Investors start out on P2P lending platforms by depositing funds for loans. Loan applicants fill out financial profiles that the site will use to determine their risk category, which is then used to calculate an appropriate interest rate. Using this financial profile, the P2P platform matches investors to potential borrowers. Investors can select from among the applicant options and applicants can look through offers and select one or more to complete their needs. All transactions are conducted through the platform.

Traditionally, banks use their existing assets to fund an approved loan. Alternatively, a loan issued through a P2P platform bypasses the bank, and the lender funds the loan using their own money.

Benefits

The main benefit of using P2P lending is that it provides the potential to get better rates than are possible when using a bank to distribute or receive loans.

P2P lending can make access to loans possible for people who would not be able to get a loan from a traditional financial institution. P2P lending websites help consumers consolidate debt for a lower interest rate and often offer attractive interest rates for home and auto loans.

The model can also help entrepreneurs get small-business startups off the ground, while making it possible for lenders to invest in the company.

Borrowing through a P2P platform also offers the user an efficient online experience.