Peer-to-peer lending, also called social lending and frequently shorthanded as P2P lending, is the practice of packaging small amounts of money from many different individual lenders to provide directly to a borrower. Rates for borrowers are usually cheaper than bank rates because there is no middleman—namely, the bank.
The lenders, who can be wealth advisors, fixed income funds, alternative asset managers, and individuals, view the loans as investments that pay a fixed interest rate. Lenders may pledge as little as $25 to many different borrowers, assembling a portfolio of loans to help manage risk.
Most peer-to-peer loans are unsecured personal loans that are transacted online through peer-to-peer lending sites. The sites collect and verify the borrower’s personal and financial information, perform credit checks, process loan payments, and service the loans. The sites profit by collecting fees from borrowers and lenders. Personal loan amounts vary widely, ranging from $2,000 to $35,000 and up.
Historically, most peer-to-peer lending sites have made loans to individuals, not businesses. But in a 2014 working paper, the Federal Reserve Board noted an increase since 2010 in P2P loans to small businesses. As an example, one P2P company, Funding Circle, specializes in loans for entrepreneurs who have been in business for at least two years. They offer loans up to $500,000 for terms up to 60 months at rates that start just under 10%.