Peer to peer (P2P) lending is when one person lends money to another directly, omitting the financial institutions that usually act as middlemen.
Peer to peer (P2P) lending has gained popularity as many seek alternative lending options, and there are several online platforms that enable people to connect.
What is Peer to Peer (P2P) Lending?
Online peer to peer (P2P) lending platforms connect lenders and borrowers directly without the help of a bank or other financial institution.
The rates and terms for lending can vary significantly by each individual lender and from site to site.
The creditworthiness of each individual borrower also influences rates and terms.
In terms of how peer to peer (P2P) lending works, it is quite simple:
Initially, an investor (lender) opens an account with a platform and transfers funds into the account.
These funds are now ready to be loaned out to others within the platform.
A borrower applies for a loan through the peer to peer (P2P) lending platform.
Each submitted loan application goes through a thorough check and is assigned a risk category.
The risk category is what determines the rates and terms for the loan.
The loan applicant can then choose different offers from various investors and either choose one offer or split the loan among a few different lenders.
This can be an automated process, or the lenders and applicants can negotiate to reach an agreement.
All transactions, money transfers, and related details are carried out through the peer to peer (P2P) lending platform.
Did You Know?
Peer to peer (P2P) lending is also sometimes referred to as “crowdlending”. Just like crowdfunding, crowdlending involves multiple users pooling money together.
Types of Peer to Peer (P2P) Loans
Within peer to peer (P2P) lending platforms, some platforms specialize in certain loan types.
Here are some common types of peer to peer loans:
1. Personal Loans
The most common type of peer to peer loans, personal loans provide the borrower with more flexibility than other loans.
People with excellent credit can borrow up to $35,000 unsecured on some platforms with flexible terms and repayment options.
One of the more common reasons people take out personal loans is to consolidate their debt.
It’s a great way to pay off higher-interest credit card balances, supporting the borrower in their journey to become debt-free.
2. Auto Loans
This type of loan is more of a regular or personal loan as it’s perfectly fine to purchase or refinance a vehicle with borrowed funds, but it can’t be an official auto loan.
The rates tend to be higher on car loans (which can also be personal loans used to pay for or refinance a car) than with a traditional financial institution.
A key difference between P2P lending and a financial institution is that the loan is not secured by the vehicle purchased with the funds.
3. Business Loan
Traditional banks and financial institutions tend to have lending criteria that are very difficult to meet, usually including a lot of paperwork, business plans, background research, and documentation.
This leads to the sad truth for many business owners that getting a loan from their financial institution is not possible.
Business owners can capitalize on the same advantages available to other peer to peer loan types, borrowing for their business instead of personally.
A simple online loan application, quick turnaround from when the application is submitted, credit flexibility, and generally lower interest rates are factors that seem to be driving the popularity of P2P business loans.
4. Mortgages and Refinances
With even more nuance than business loans, the mortgage industry has always been a complex structure of underwriting that leads to confusion for borrowers.
Seeing the opportunity, peer to peer (P2P) lending has started its move into the mortgage lending market.
The general requirement is that there should be at least a 10% down payment on the house, however, it does not include mortgage insurance which traditional mortgage lenders usually require for a down payment of under 20%.
Additionally, peer to peer (P2P) lending platforms do not charge origination fees and there is generally no prepayment penalty.
5. Student Loans
Finding lenders willing to do a student loan refinance is difficult, but peer to peer (P2P) lending has been able to bridge that gap and is a key component in the student loan refinancing segment.
Generally student loan applications verify income and credit score and look at the applicant’s education, career experience, and field of work.
Peer to Peer Lenders in Canada
Considered a popular peer to peer (P2P) lending platform in Canada, Lending Loop is a Toronto-based startup that aims to make funding more accessible to small businesses.
It offers a customizable dashboard to make the lending experience as convenient as possible for small businesses, flexible repayment terms, different loan types, and an AutoLend feature where the platform will automatically connect lenders with a borrower that matches their risk tolerance.
Lending Loop also offers additional features including credit score monitoring, business loan guides, and a business loan calculator to support borrowers and lenders in making informed financial decisions.
Toronto-based Canadian peer to peer (P2P) lending platform goPeer looks for opportunities to bring financial stability to Canadians.
They seek to help borrowers bypass lengthy qualifications required by financial institutions to receive loans.
goPeer was the first P2P lending company in Canada, introducing peer to peer (P2P) lending via a platform to the Canadian public and has boasted over $100 million in loan applications since the beginning of 2021.
Why do people invest in goPeer? So far, the average return for investors is a comfortable 10.1% annually.
Additionally, over 25,000 investors and borrowers have joined the platform, a 400% growth rate since 2021.
goPeer is planning to continue leaning into the peer to peer (P2P) lending trend, which shows demand for alternative loans.
Frequently Asked Questions
- Can you make money with P2P lending?
Yes, it is possible to make money with P2P lending, but it also involves risks. P2P lending platforms provide an opportunity for investors to earn interest income by lending money directly to borrowers. The interest rates offered to investors are typically higher than those of traditional investment options, such as savings accounts or government bonds. However, investors should also be aware of the potential risks, such as default or late payments by borrowers, which could result in a loss of invested capital. It is important to thoroughly research P2P lending platforms and diversify investments to minimize risk and maximize potential returns.
- Is peer to peer (P2P) lending legal in Canada?
Yes, peer to peer (P2P) lending is legal in Canada. However, the regulatory landscape for P2P lending is still developing and varies by province. In some provinces, P2P lending platforms are required to register as a securities dealer, while in others they may be subject to lending regulations. The Canadian Securities Administrators (CSA) also issued guidance in 2019 for platforms operating in the P2P lending space, including requirements for transparency, disclosure, and risk management. It is important for both borrowers and investors to carefully research and understand the regulations governing P2P lending in their province, as well as the terms and conditions of any P2P lending platform they choose to use.
- Is peer to peer (P2P) lending safe?
Peer-to-peer (P2P) lending can be safe, but it also involves risks. P2P lending platforms connect borrowers directly with investors, allowing investors to earn interest income by lending money to borrowers. However, investors should be aware of the potential risks, such as borrower default or late payments, which could result in a loss of invested capital. Additionally, P2P lending platforms may not be covered by deposit insurance, which is available for traditional savings accounts at banks and credit unions. To minimize risks, investors should carefully research P2P lending platforms and diversify their investments. P2P lending platforms may also have measures in place to mitigate risks, such as credit checks on borrowers and collections processes for late payments.