DEFINITION
Peer-to-Peer (P2P) Lending
Peer-to-peer lending, or P2P lending, is an approach to lending where individuals or businesses borrow money directly from other individuals or businesses without the involvement of traditional financial institutions. This is done through special lending platforms and allows the borrower to potentially get loans at a lower interest rate and the lender to make a higher return.
Synonyms
Social lending, direct lending
Acronyms
P2P lending
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Synonyms
Social lending, direct lending
Acronyms
P2P lending
Examples
A small business owner is looking to expand their business and needs a $30,000 USD loan. However, the bank denies the loan due to their internal policy. The business owner therefore turns to P2P lending and makes a loan request on a P2P platform. Multiple people see the request and decide to borrow parts of the overall loan amount. Thus the business owner gets the capital they need and all the borrowers become entitled to the agreed-upon interest rates.
FAQ
Is P2P lending illegal?
While there may be differences between jurisdictions, P2P lending is generally seen as an investment and completely legal. However, investments made through P2P platforms aren’t protected by the government.
How does P2P lending differ from traditional lending?
Unlike traditional lending, P2P lending platforms don’t have intermediaries. Instead individuals or groups directly lend or borrow money, potentially reducing costs.
What are the risks of P2P lending?
In P2P lending, the lender bears the risk, not the platform, meaning that if the borrower defaults the loan, the lender can lose some or all of their money. On the other hand, lenders can impose very high interest rates, surpassing that of traditional financial institutions. Therefore, both parties can be at risk.
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