New to peer to peer lending? It’s actually a process that has been around for nearly 15 years in the U.S. and has continued to grow in that time. It’s a way for borrowers access competitive rates outside the traditional bank lending model.

peer to peer lending

It also brings the potential for greater returns to individual investors, often even including those who are non-accredited. P2P lending is a platform meant to cut out the middleman and generally democratize the loan landscape.

On top of that, there are reputable P2P lenders across industries. That means better diversification amongst personal loans, business loans, and even commercial real estate projects.

Let’s jump in and find out how P2P loans work and who are the best P2P lenders out there today.

How does a peer to peer loan work?

Peer to peer loans take online lending to the next level, directly pairing borrowers with investors in a virtual platform. It’s a unique alternative to traditional banking and often comes with lower rates for borrowers and higher yields for investors.

P2P lending cuts out a lot of the costs generally associated with taking out loans through a bank. There are no physical branches to support and staffing is generally a much less substantial expense for P2P companies.

How does the lending process differ between a peer to peer loan and a bank?

From the borrower’s perspective, the application process starts much of the same way as any other loan process. Most P2P lenders allow for a prequalification that only requires a soft credit pull, giving you an idea of what kind of loan you could qualify for and with what terms. At this point, you’re also given a loan grade, which classifies your application as a risk rating.

Next, your funding request is posted on the P2P platform. Investors can review the details of your inquiry, such as what you’ll use your loan funds for, non-identifying aspects of your application, and their anticipated return. If interested, the investor can then commit any amount of funds to your loan. Once you reach a certain percentage of committed funding, your loan application moves onto the next level.

What happens next in the application process?

You’ll need to submit information to verify your application, like proof of income and any other documentation required by the lender. It then goes to underwriting and you’ll receive an official loan agreement outlining the details of the loan, including rates, terms, and your repayment responsibilities.

After you sign and submit the loan agreement, the loan funds are typically deposited into your bank account within 24 to 48 hours.

Borrowing through P2P lenders

Because there are extra steps involved in the approval process for a P2P loan, it can take longer to get your funding when compared to other lenders. On the plus side, however, borrowers can often qualify for more competitive rates and terms.

And since there’s upfront transparency to investors regarding each borrower’s credit rating, low credit borrowers may still get the chance to qualify for a loan, even if they’ve been denied by other lenders.

P2P lenders also offer a wide degree of flexibility on loan use. While all lenders are different, most generally allow for common funding purposes such as debt consolidation, home improvements, life events, and other major purchases. Your exact need could influence which P2P lender you ultimately choose.

Investing through P2P lenders

Investors are often drawn to peer to peer lenders for the pure fact that returns are often higher than other investment choices. Plus you get to administer as much control as you’d like when managing your portfolio. That’s because you can pick and choose how much you invest at any given moment, in addition to what mix of loan grades you want in your portfolio.

Alternatively, you’re also able to set your investments on autopilot with most lenders. You generally can input how you’d like your investments to be distributed, and the lender will then automatically disburse your funds to loan requests that meet your criteria.

This frees you up from having to manually review borrower requests, making the process as simple as you want it to be. While peer to peer lending certainly contains a large degree of risk, some investors may choose to make it a part of their portfolios.

Which is the best peer to peer lender?

There are a number of reputable peer to peer lenders online today. Here is a breakdown of the best ones to help you choose the right one, whether you’re interested in borrowing or investing.

Prosper

Prosper is one of the largest P2P lenders, having facilitated $13 billion in loan transactions. That’s a huge amount and they rely heavily on large institutional investors in addition to individuals who back loans for borrowers. Prosper offers both debt consolidation and personal loans, which can be used for home improvement, vehicles, adoptions, engagement rings, special occasions, and more.

The eligible loan amount is broad, ranging between $2,000 and $40,000 with the choice of either a three or five-year repayment term. Interest rates are competitive and always fixed, meaning you know exactly how much your monthly payment will be for the entire life of the loan.

For investors, Prosper boasts an historical average of 5.5% and the ability to diversify your holdings beyond the typical stocks and bonds. They also pay out monthly returns, so you could potentially earn a steady stream of income. Any returns are deposited straight into your account on a regular basis, so you get quick access to those funds.

Read our full review of Prosper

LendingClub

Lending Club is another major player in the P2P space, helping clients borrow more than $85 billion over the years. The lender advertises a quick funding process with cash available within as few as seven days. Loan options include consolidating debt, paying off credit cards, making home improvements, or covering a major expense. In addition to personal loans, LendingClub also offers auto refinancing and medical debt loans.

The application process is easy for borrowers. You fill out an online form in just a few minutes, including the amount of money you’d like to borrow. If approved, you can review different loan offers that show your potential interest rate, repayment term, and monthly payment amount.

LendingClub works with both individual and institutional investors. For individuals, you can choose between an investment account and a retirement account, with historical returns ranging between 3% and 8%. You can start with as little as $25 invested in a single loan. You can also automate your investments with pre-selected strategies that correspond to your financial goals, or you can manually select your investments.

Read our full review of LendingClub

Upstart

Upstart offers a huge variety of loan options, which is probably why it’s experiencing such enormous growth as a lender. As a borrower, you can use an Upstart loan to pay off your credit cards, consolidate debt, refinance student loans, pay for personal expenses, buy a car, or even start a business.

Smaller loan amounts are available and start at $1,000 or you can apply for as much as $50,000. You can repay your loan funds over three or five years.

What makes Upstart stand out to borrowers?

The approval process is much more holistic than many other lenders. Rather than placing a primary focus on your credit score, Upstart uses your education and your job history to help you qualify for lower rates. The thinking is that by factoring in these considerations, you have a financial potential that lessens your risk. Plus, you can get your loan funds in as fast as one day.

Investors have two choices when selecting Upstart. You can customize a plan for automatic investments or you can open a self-directed IRA to help supplement your retirement savings. Upstart also states that 91% of their loans are either current or paid in full. This can help you determine the risk associated with the platform, which seeks to serve quality borrowers who simply have limited credit history.

Read our full review of Upstart

PeerForm

PeerForm offers personal loans on a P2P platform in amounts ranging from $4,000 to $25,000. All loans are unsecured, so as a borrower, you don’t have to worry about providing any collateral. You can check your rate by filling out a simple online form.

After that, you may receive one or more loan offers outlining different rates and terms. If one of those offers works for you, your loan is then listed on PeerForm’s marketplace platform.

Once your loan is funded by investors, you simply need to submit a few pieces of documentation to verify your identity and income. Examples of information you may need to submit include a copy of your ID, bank statements, pay stubs, and/or recent tax statements.

When you invest with PeerForm, you can choose between whole loans and fractional loans, the latter of which are geared towards individual accredited investors. PeerForm advertises competitive, risk-adjusted returns. Like most other P2P lenders, PeerForm assigns each loan applicant a grade, which comes with a corresponding interest rate.

Read our full review of Peerform

Funding Circle

Funding Circle offers a slightly different model, providing P2P small business loans. Approvals can be received in just 24 hours, making it a faster option than traditional banks. Small business owners can borrow between $25,000 and $500,000, with repayment terms lasting anywhere from six months to five years. Plus, you get a dedicated account manager who can help with any questions throughout the process.

Funds can be used for a range of purposes, including increasing cash flow, hiring new employees, buying new equipment, or upgrading your premises. The initial application takes just 10 minutes to complete. Within a day, you may talk to both a loan specialist and underwriter to learn more about your business. Once you’re approved and agree to the loan terms, you can get funding within five days.

Investors can diversify their fixed income portfolios by choosing to invest in secured business term loans through Funding Circle. There is, however, a pretty hefty minimum investment, which starts at $250,000. You can either select notes manually from the marketplace or enroll in automatic investing.

PeerStreet

Rather than focusing on personal loans, PeerStreet allows investors to finance short-term real estate loans. According to PeerStreet, their investments could be less volatile than the stock market. Investors select first lien real estate loans that are highly vetted before being offered.

PeerStreet works with private lenders to source these investments, which must meet a variety of requirements using both algorithms and manual processes. Investors can choose their projects one by one or use PeerStreet’s tool to match with investments that meet their chosen criteria. Additionally, you can start with just $1,000 per loan, making it easy to diversify.

What kind of returns can you expect with PeerStreet?

Some investments could potentially bring in double-digit returns, but the company also states that an example yield is 6% to 9% over 12 months. Service fees generally range from 0.25% to 1.0% and is disclosed with each project. Obviously, there’s risk in any investment, and these real estate loans are no different.

In order to qualify as an investor with PeerStreet, you must be accredited. That means you must have an annual income of at least $200,000 or $300,000 in joint income with your spouse. Additionally, your net worth must be at least $1 million.

Fundrise

Fundrise is another P2P real estate platform that gives individual investors access to multimillion-dollar projects. The investment horizon for each project is usually between three and seven years. While that’s certainly not as liquid as investing in the stock market, the benefit is that Fundrise’s investments are expected to perform better.

Investors can earn an 8% to 11% expected annual return. Most plans are charged an annual 0.85% asset management fee, while clients using investment services pay a 0.15% advisory fee.

How does Fundrise choose its investments?

The goal is to buy properties for less than their replacement cost, then improve them using local industry experts. All aspects of the project are analyzed, including the sponsor, the property itself, the local market, and the overall economy. In fact, Fundrise states in a year of reviewing 2,000 proposals, they approved less than 2%.

Fundrise offers three different investment plans. The Supplemental Income plan creates an ongoing income stream. Balanced Investing allows you to heighten your diversification. Finally, Long-Term Growth seeks to maximize returns over longer periods of time. You can even get started with a minimum investment of just $500. Anyone over the age of 18 can invest with Fundrise.

How much money can you make investing through peer to peer lending?

There can never be any guarantee with how much money you can make investing in peer to peer lending. It depends on so many variables, including your risk tolerance, the loan types you choose, as well as more general factors like the economy. Some P2P lenders advertise the potential for double-digit returns, and most at least say they outperform the stock market while also being less volatile.

P2P lenders generally offer investor materials that you can review to get more details on the risk versus return. To help increase your returns, however, you can consider some general advice. First, think about diversification in relation to your broader portfolio and your P2P portfolio.

You probably don’t want to invest solely in high-risk, high-yield loans. Try investing enough money so that you can spread the money over different loan grades.

Is peer to peer lending safe?

Just like your returns rely on a number of factors, so does your safety as an investor choosing P2P loans. Your funds aren’t insured, but all P2P lenders must register with the SEC. This keeps them under federal scrutiny to ensure they stay in practice with all the current regulations.

Still, diversity must be a priority in minimizing your risk when investing in these types of loans. If a borrower defaults on a loan you’ve invested in, you’ll lose that money. Be sure to create a healthy balance within your accounts. You can also compare default rates among P2P lenders. You can also start off conservatively as you learn the process, then add in higher yield loans to bolster your returns. It’s also important to check out the lender’s vetting process for its borrowers.

Bottom Line

Whether you’re interested in borrowing or investing in a P2P loan, there are countless options available today. Personal loans, business loans, and real estate investments have become more accessible to all parties thanks to automated platforms connecting individuals on both sides of the equation.

As with any financial decision, the key is to do your own research and compare options. Each P2P lender has its own strengths and weaknesses. Do some digging to figure out which one best meets your needs for either funding or investing. Once you find it, it’s a win-win for everyone.