Peer-to-peer lending (P2P)

Peer-to-peer lending, or P2P lending, is a marketplace lending model that enables individuals with only hundreds or thousands of dollars to make loans to other people — peers — who want to borrow similar amounts.

This model is in decline in countries with well-developed financial industries. Over the years, banks and other institutions have become more active, crowding out true P2P lending. Although some developing economies still have robust P2P platforms, Sharestates is one of only a few remaining in the U.S. through which retail investors participate on par with institutional investors.

P2P lending terms are usually based on the borrower’s income and creditworthiness. Applicants prove these through tax or bank records or provide a forward-looking business plan. In some cases, lenders make decisions based entirely on the borrower’s self-declared statement. This is different from balance-sheet lending, which is another form of platform lending. Balance-sheet lending involves putting a lien on a property — an asset on the balance sheet.

P2P lending vs. bank partnership

Marketplace lending uses online platforms to connect borrowers with investors willing to offer loans. The platform then collects the interest and principal payments from the borrowers and sends them to investors, keeping a fee for acting as the intermediary. Marketplace lending offers both new loans and for refinancing.

An FDIC report distinguishes between the two funding models. Specifically, federal bank insurer refers to P2P as “direct funding” and the institutional version as “bank partnership”.


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