What Is Peer-to-Peer (P2P) Lending?

Written by Bryan Daly
Fact-checked by Caitlin Wood

What is Peer-to-Peer (P2P) Lending?

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Whether you’re looking to fund your business or pay for your personal expenses, there are sure to be plenty of physical lenders and online lending platforms in your area to apply with. The only problem is that, in certain situations, it can be tough to get approved for a large loan with a good interest rate and favourable conditions. This is why peer-to-peer lending platforms have gain popularity in recent years.

Check out this p2p lending platform on Reddit.

What is P2P Lending?

Peer-to-peer lending (sometimes referred to as “person-to-person” or “social” lending) is when you borrow credit, such as a loan, from anonymous lenders and investors via an online platform. Unlike with traditional lending, where you borrow from and repay a single company, multiple lenders and investors may pool their resources, each offering to finance a percentage of your loan in exchange for a cut of the eventual profit.

So, instead of applying with your bank or credit union, where approval standards are more difficult to pass, a P2P platform can match you up with several lenders or investors in your area, any of which might be better suited to your financial needs.

P2P Lending For Businesses

For instance, peer-to-peer lending is now a popular solution for businesses that need capital to finance part of their operation, like startup costs. Although you can find a lot of traditional business lenders on a P2P platform, institutional investors also offer business loans on these websites, so that they can add variety to their stock & trade portfolios.

P2P Lending For Individuals

Individuals can get financing through a P2P platform as well. So, if you’re looking for some extra cash to cover your personal expenses, such as home repairs or high-interest debt, a peer-to-peer loan might be a good option to consider. People you know can also use P2P lending to invest in your business and earn interest on the side.

P2P Lending Overall

All this to say that peer-to-peer lending is becoming more and more sought after these days, especially by people and businesses who are having trouble qualifying with their financial institution for one reason or another. In fact, many financial companies now specialize in peer-to-peer lending and can offer you all kinds of financing.

Types of Loans You Can Get Through Peer-to-Peer Lending

Although every P2P lender has its own products, financing amounts and regulations, most of these platforms offer:

Personal Loans – A specific amount of borrowed money that you repay in installments (with interest) over a set schedule. Usually, the loan gets deposited directly to your personal bank account and your debt will be broken down into several months or years of monthly, weekly, bi-weekly, or bi-monthly payments.

Business Loans – Can be larger and feature longer terms than most personal loans. Tighter restrictions may also apply. While a P2P loan can be easier to get than a bank loan, you may need a strong business plan, solid projected revenue and high business credit score to qualify for decent rates and conditions.

Debt Consolidation Loans – This type of loan is meant specifically to help you or your business pay off multiple debts in one shot. The overall goal is to leave you with a single repayment plan, which would hopefully save you money in interest, despite rates being slightly higher than some regular loans.

Keep in mind that these are just a few of the more common loan types you’ll find on a P2P platform. Your own peer-to-peer lender might offer different options and rates, this is why it’s important to compare multiple platforms before you make your final decision.

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The Advantages and Disadvantages of Peer-to-Peer Lending

Now that you have a better understanding of how peer-to-peer lending works, it’s time to learn about the advantages and disadvantages of P2P loans. Carefully consider these pros and cons, as they can significantly affect your finances:

Advantages For Borrowers

Individuals and businesses can get the money they need to finance their expenses while repaying their debt over several months or years. Unlike some bills, which require immediate payment, this can be more affordable.

Approval requirements aren’t as tough as those of a traditional prime lender. You can also get your money faster, as well as qualify for better rates and conditions, especially if you or your business have strong finances and credit.

More often than not, P2P loans are unsecured, meaning no collateral is required to get approved. So, unlike with a secured loan, where your assets could be seized if you miss too many payments, this isn’t a danger with P2P borrowing.

Interest rates can be lower than other personal or business financing products, like credit cards. Plus, you won’t be charged any prepayment penalties to pay back your loan ahead of schedule. Both these benefits can help you save money.

Disadvantages For Borrowers

While interest rates can be lower than some credit products, they may be higher than other loans, particularly if your credit isn’t great. What’s worse, having a personal or business credit score under 630 can get you denied altogether.

Additionally, some P2P lending platforms charge more fees than traditional lenders. You may even be subject to a 6% loan origination fee which, when coupled with a high-interest rate (sometimes over 30% APR) can cost a lot.

Depending on what platform you use and which lenders or investors you get paired up with, you may not be able to borrow more than $30,000 – $40,000 at any given time (lower amounts than some traditional will lenders offer).

Advantages For Lenders/Investors

Funding an individual or business can frequently lead to higher profits than with other types of investments and savings programs. Despite the risk involved, lending out larger amounts of credit can yield even better financial results.

As mentioned, investors can benefit from P2P lending because it automatically diversifies their portfolios. While plenty of stocks and bonds are available, some platforms also offer mutual funds, real estate financing and other alternatives.

Once you start collecting payments from your borrowers, you can withdraw the proceeds from your P2P platform account and spend them how you wish. If you prefer, you can reinvest them into other peer-to-peer lending programs.

Disadvantages For Lenders/Investors

P2P investments are not protected by the Canadian government. So, if borrowers default on their loans, you could lose money. Selling higher quality loans is less risky but can lead to less interest in return (and vice versa).

If you don’t accept more risk by offering a variety of loans, your portfolio may not be diverse enough to make any real profit on your investments. Experts say having at least 100 – 200 active loans in your portfolio will yield the best results.

Since loan terms can be several years long, you may see a slower return on your investments than you would with regular stocks and bonds. Not to mention, P2P lending is a relatively new industry, so it can be a much harder market to predict.

The Cost of Peer-to-Peer Lending

When applying for any credit product, one of the most important things to think about is how much it will cost you while you’re still paying it off. Although a peer-to-peer loan functions almost the same as a normal loan, the final cost can vary depending on a number of factors, including but not limited to:

Loan Amount & Term Length – While larger, higher-quality loans usually result in lower interest rates, they can lead to longer repayment terms. The lengthier your term is, the more interest you’ll pay overall, which is why it can be helpful to take advantage of the “no prepayment penalties” rule when it’s an option.

Interest Rate – Remember, P2P loans (especially those with shorter terms) can come with higher interest rates than other credit products. The worse your credit, income and debts are when you apply, the riskier your lender/investor will consider you and the higher your rate will be (the same goes for your business).

Fees – Also mentioned earlier, peer-to-peer lending can be accompanied by hefty fees, mainly because there’s a lot of administrative work involved with the financing, investment, and closing processes. Plus, you could be charged a penalty fee for every late, incomplete or missed payment on your profile.

How Do You Qualify For a Peer-to-Peer Loan?

Luckily, applying for peer-to-peer lending isn’t too different from a regular personal or business loan. The stronger your finances are, the easier it will be to qualify for a large loan with a decent interest rate and an affordable term. Here are some of the main elements your lenders or investors might inspect when you apply:

Income – Of course, the primary thing that P2P loan providers want to know is that you’ll be able to afford all the costs associated with your payments. The higher your income is prior to applying, the better your loan conditions and interest rate will be.

Credit Score – Your credit tells the loan provider how you’ve handled any previous or existing debts. If you have a good credit score (650 – 900), they will be more inclined to approve you for favourable loan conditions. Your business has multiple scores with all of Canada’s credit bureaus but similar rules apply.

Debts – It will also be easier to qualify for a decent P2P loan if you or your business have little-to-no outstanding debts, thereby minimizing risk for the lender. The same goes for debts you’ve had in recent years. If you have a responsible payment history, your lender will consider you even less risky.

Business Plan – If you’re applying for a P2P business loan, your lender/investor may ask you to present a plan that outlines how profitable your business will be in the future. Your plan should feature all the most relevant details, such as your company’s projected revenue, current income, and unpaid debt levels.

Is a Peer-to-Peer Loan Right For Me?

Unless you’re an experienced borrower or investor, it can be tough to know whether peer-to-peer lending is actually the best solution for you. After all, there can be some serious risk and cost associated with the repayment process, not to mention a low rate of return if you’re lending to someone with a long loan term.

All that said, there are plenty of benefits that you can access by getting a peer-to-peer loan or funding someone else’s, namely the ability to get approved for a large amount of financing with good conditions and fewer requirements than a bank or credit union.

Before you apply for a peer-to-peer loan, get a price quote from your lending platform, so you can factor the costs into your budget. Whether you’re a borrower or an investor, it’s equally essential to think about what could happen in the future. If the costs and risks associated with peer-to-peer lending seem too daunting, it might be safer to speak with a financial advisor and find an alternative.

Loan Glossary

Terms


Accrued Interest	Interest that is earned by an individual, but not yet received. Or, interest that is owed, but not yet paid. Interest is typically earned or payable after a certain period of time, such as a month or a year, which is why it can accrue.
Annual Percentage Rate (APR)	The interest rate you pay over a full year in exchange for borrowing. An APR is expressed annually but is typically charged monthly. You can determine the total monthly interest you’ll pay on debt by multiplying the borrowed amount by the APR and then dividing by 12.
Assets	Anything that has financial value is considered an asset. In order to reap the benefits of an asset, you must also own it as an individual or business. When it comes to debt, usually only real estate, jewellry, vehicles, and investments are considered assets.
Borrower	An individual or entity that takes something (for example money or equipment) with the intention of returning it to the original owner. When the borrower it taking out a loan, there is usually an agreement involved and applicable interest.
Cash Advance	A cash withdrawal from a credit card. Cash advances are a very expensive form of financing as the interest rate on the borrowed amount is higher and there is often a flat fee. In addition, interest becomes effective immediately after you withdraw the cash, instead of after the balance due date.
Co-Borrower	An individual who shares an obligation of something that was borrowed with one or more people. All co-borrowers listed on an agreement are fully responsible for repaying the obligation.
Collateral	Any asset that is used to secure debt. In the event that the borrower defaults on the loan, the lender has the right to seize the asset and sell it to cover the owed amount. Collateral is also commonly referred to as security.
Cosigner	An individual who agrees to make your loan payments and otherwise be responsible for your debt in the event that you default on the loan. Using a cosigner is a popular option for individuals who have trouble securing debt on their own.
Cost of Borrowing	All of the costs a borrower incurs when borrowing an asset or money. Examples of borrowing costs include legal fees, interest, loan origination fees and penalties.
Debtor	An individual or entity that owes a sum of money to a creditor.
Delinquency	Failure to pay the minimum payment on a loan or account on or before the agreed-upon payment date. Delinquency is typically categorized in 30, 60, 90 or 120 days since lenders typically have monthly payment cycles. Delinquent accounts may eventually turn into defaulted accounts.
Dependent	An individual who relies on another individual for financial support. Usually, this refers to a family member, common-law partner or spouse who is unable to financially support themselves.


Equity	The market value of an asset you own less the amount still owed (including any additional fees to sell or repay debts) on the loan used to purchase the asset if any. Equity increases when you pay down the debt as well as when the value of the asset increases. Equity can be calculated at any point in time and is also referred to as lendable value or net value.


Installments	A payment schedule that breaks up an owed amount of money into several equal amounts, otherwise known as installments, which are paid over an agreed period of time.
Loan	An amount of money that is borrowed by one entity from another with the expectation that the amount will be paid back. Interest is typically applied on the owed amount.
Loan-to-Value Ratio (LTV)	The ratio of what amount was borrowed to purchase an asset in relation to the market value of that asset. The formula would be: the total amount borrowed for the purchase divided by the total selling price of the asset. The borrowed amount can differ from the selling price if the individual makes a down payment, for example. In general, the lower the LTV, the more favourable the terms of the financing will be.


Payday Loans	A short term, small loan that a borrower promises to repay on their next pay day. Payday loans are known to be an expensive and risky form of financing that makes it challenging for the borrower to repay and manage.
Payment Period	The period of time over which a borrower is obligated to make a payment. Payment periods could be weekly, bi-weekly or monthly, sometimes even longer.
Prime Rate	The prime rate advertised by a lender is typically based on the Bank of Canada’s interest rate that is set each night, which may change at any time.
Principal Balance	The total remaining balance of a loan, without considering interest and other fees.


Secured Loan	A loan that is secured by an asset known as collateral or security. In the event that the borrower defaults on the loan, the lender has the right to seize the asset securing the loan and sell it to repay the owed amount. This type of loan bears less risk for the lender, but more risk for the borrower.


Unsecured Loan	A loan that is not secured by an asset known as collateral or security. In the event that the borrower defaults on the loan, the lender will not have the opportunity to seize the collateral or security to repay the owed amount. This type of loan bears more risk for the lender, but less risk for the borrower.