What is a Peer-to-Peer Loan or Peer-to-Peer Lending?

by Lynnette Khalfani-Cox, The Money Coach on October 28, 2011

Q: What is a peer-to-peer loan or peer-to-peer lending?

A: In the U.S., peer‑to‑peer lending is a relatively new form of social lending that removes banks as the middlemen in a loan transaction.

With a peer-to-peer loan, an individual – sometimes called the lender or the investor – provides funds to a borrower and does so through the help of an intermediary company Two of the most popular peer-to-peer lending companies in America are LendingClub.com and Prosper.com. They screen borrowers and facilitate the loan process for individuals who want loan money to other individuals or their “peers.”

The whole idea behind peer-to-peer lending is that individuals who have additional cash to invest are readily available to loan money to borrowers in need who might otherwise not be able to get the funds they require through traditional sources such as a bank.

Peer-to-peer lending is also called P2P or person-to-person lending.

This Article Answered The Following Questions:

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Lynnette Khalfani-Cox, The Money Coach

Personal Finance Expert and Co-Founder at Ask The Money Coach.com
Lynnette Khalfani-Cox, The Money Coach is a personal finance expert, speaker, and author of numerous books on personal finance. She appears frequently as an expert commentator on television, radio and in print.

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The Money Coach

Thanks for the additional info, Glenn. And not to worry: This was a basic, brief definition of peer-to-peer lending, and not meant to be all-inclusive in description and scope. But in the upcoming series of posts I’m doing on P2P lending, I spell out in more detail how it works, who’s doing it and why. Again, thanks for reading!

Glenn G. Millar

Thanks for the article on peer-to-peer lending!

One clarification – What makes p2p lending unique is that it is the crowdfunding aspect. Each loan is funded by dozens and dozens of lenders in small increments until the total loan request is fulfilled.

Then every time the borrower makes a payment to Prosper.com, these loan payments (principal and interest) are divided among the lenders.

This system allows borrowers to get great rates and allows even small lenders to diversify their portfolio by spreading their investment over many, many borrowers.

Glenn G. Millar
Prosper Employee

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