What is Peer to Peer Lending?

Peer to Peer lending (also known as P2P lending, or person to person lending) has been discussed on this website before. Peer to peer lending is really just the act of, well, lending to your peers

What is Peer to Peer Lending?

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It sounds simple, doesn’t it? That’s because it is. Think of it this way:

Peer to peer lending cuts out the middle man and makes the lenders (you, me, the guy next door) money on interest, instead of the banks. Banks traditionally loan money to individuals and businesses, charging an interest rate to make money. You then go and make a deposit to your bank. Maybe it’s your paycheck. You deposit $2,000 into your bank account. The bank then ‘borrows’ your money (and charges you for it through account fees) to lend to other people.

This is an over-simplistic way of putting it, but this is essentially what happens when it comes to traditional lending.

P2P lending, on the other hand, removes the bank. There are platforms that will let you both invest your money in person to person lending opportunities, and borrow from your peers. Prosper (a favorite in the personal finance community) is one such platform, and many people have made a nice profit as investors from it.

It can be a great way to make passive income, and a great way for companies or individuals to get loans (albeit higher interest loans) while bypassing the traditional bank and borrower model.

As to the borrowers, the interest rates are higher than those of traditional banks. Often, though, the banks terms and your ability to get a loan may be impacted by things that wouldn’t necessarily impact your ability to borrow from a peer.

 I’ll be discussing different ways of making passive income and perhaps some more untraditional investing methods more often. P2P lending is one that has been getting some attention lately so deserved a mention.

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6 thoughts on “What is Peer to Peer Lending?

  1. I loved P2P lending back in the day. Sadly, in my state, I am no longer allowed to fund loans. It stinks because I made a nice return on my money and I felt good that I was helping real people out as opposed to just investing in a bond mutual fund where I didn’t invest in the individual.

  2. I looked into using this method when I switched loans. I was tempted but worried I would get rejected as I read that they’re very strict with who they lend to so I stuck with my bank. When I eventually do get some savings together, I’m hoping to make money using P2P lending. Thanks for the post.

  3. I’ve heard a lot about P2P lending before, but I don’t know much about it, and have never thought about using it as a passive income stream. Do you need to have a lot of money in order to make money using P2P?

  4. I use Lending Club. So far I have only invested about $2000, just to try it out. My expected return, after defaults, is close to 12%. That’s pretty good to me. Time will tell if this is a good investment, but I like that this is money with a decent return that is not tied to the stock market.

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