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Pros:

Quick lending process: P2P loan applications take just a few minutes to complete, but loan applications through banks and credit unions are often more involved and time-consuming.
Peer to peer funding for bad credit: P2P loans have more flexible terms
Fast access to cash: Most P2P loans are funded in just a few days. It can be a week or more before you receive traditional loan funding.
Higher returns to investors: Compared to traditional loans, P2P loans often give investors higher returns on their investments.

Cons

Higher risk: Since borrowers with lower credit scores may be approved for P2P loans, there’s a higher chance of the borrower defaulting on the loan. Lenders need to be aware of this risk when deciding to fund a P2P loan.
No insurance or government protection: A lender’s P2P investments aren’t FDIC insured, so if the borrower defaults on the loan, the lender might not get their money back.
High interest rates: Each P2P platform sets its interest rates. Depending on the platform and a borrower’s credit rating, P2P interest rates could be higher than a traditional loan’s interest rates.
Can affect credit score: The hard credit inquiry of a P2P application can slightly lower a borrower’s credit score. If borrowers miss payment deadlines, their score may drop.
Additional fees: Many P2P lenders charge origination fees in addition to interest. According to Bankrate, origination fees can range from one to eight percent of the loan, which can increase the amount that the borrower has to repay.

Peer-to-Peer Vs Traditional Loans - What Is Better for Your Small Business?

Whether a peer-to-peer or traditional loan is right for your business will depend on your credit score and how quickly you need the funding. If you don’t qualify for a traditional loan because of poor credit or because your business is too new, a P2P loan can be a good alternative that lets you quickly and easily get funding. But if you have poor credit, you could pay higher interest rates for a P2P loan than a traditional loan.

  • Traditional loans can have strict eligibility requirements, and the funding process can take weeks. Business owners with strong credit and an established business history may get better interest rates with a traditional loan. You might wish to start by looking into what is a microloan.
  • P2P business loans can be ideal for business owners who want a simple application process and who need funding quickly. They can help business owners with poor credit get funding, and business owners with strong credit might find a P2P loan offers the best interest rates. These loans are suitable for both startups and established businesses.

To explore all of your options, check out this article on the best small business loans.

I Want to Invest in Peer-to-Peer Loans - Is It Safe?

If you want to invest a small amount of money, peer-to-peer loans can be a good investment. You can use P2P loans to diversify your portfolio, and since you can choose funding opportunities based on the borrower’s credit score, you can minimize your risk. But is peer-to-peer lending safe? There are some risks involved, and since P2P loans aren’t government-protected, there’s no guarantee you’ll get your money back.

Peer-to-peer investing may be right for you if you:

  • Want to invest small amounts of money and losing that money won’t harm your finances
  • Want a more hands-on investment opportunity that lets you select the funding requests you invest in
  • Understand that P2P platforms charge earning fees that will reduce your profits

Conclusion

What is peer-to-peer lending? It’s an alternative to traditional funding that benefits borrowers and lenders. If you want to invest small amounts of money, you can pick and fund P2P loans and might see greater returns. If you need funding quickly or have found that traditional bank loans aren’t right for you, P2P loans might be a better fit. Fees and policies vary across P2P platforms, so whether you want to borrow or invest, carefully research each platform.

About the Authors

Paige Cerulli

Written by: Paige Cerulli

Business Content Writer

Paige Cerulli is a content writer and copywriter who specializes in business, finance, pet, and health topics. An entrepreneur herself, Paige enjoys writing about topics that help business owners to make well-informed strategic decisions.

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Kal Salem

Reviewed by: Kal Salem

CPA, PMP and Finance Consultant

A CPA and finance professional working with small businesses to educate owners and grow alongside their businesses. He holds a Masters in Accounting and a BS in Supply Chain Management. Owner at Salem CPA Services LLC.

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Somer G. Anderson, Ph.D.

Fact checked by: Somer G. Anderson Ph.D., CPA

Accounting and Finance Professor

Somer G. Anderson has been working in the Accounting and Finance industries for over 20 years as a financial statement auditor, a finance manager in a large healthcare organization, and a Finance and Accounting professor at Maryville University.

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