Peer-to-peer (P2P) lending makes it possible for individuals to obtain loans directly from other individuals, without going through a bank or other financial institution. The proliferation of websites that facilitate P2P lending in recent years has greatly increased its adoption as an alternative method of financing.

P2P lending is also known as "social lending" or "crowd lending." Major players in the field include such platforms as Funding Circle, Kiva, LendingClub, Prosper, and Upstart, among others.

• Key Takeaways
• P2P lending allows individuals to lend money to or borrow money from other individuals without going through a bank.
• P2P lenders are individual investors who typically want a better return on their cash savings than they would earn with a bank account or money market fund.
• P2P borrowers seek an alternative to traditional banks or a lower interest rate than they could get at one.
• The default rates for P2P loans can be much higher than those in traditional lending.
• P2P lending platforms also impose fees on borrowers or lenders and sometimes both.

How Peer-to-Peer Lending Works

P2P lending websites connect individual borrowers directly to individual lenders. Each platform sets its own rates and terms. Most sites have a wide range of interest rates based on the creditworthiness of the applicant.

Typically, the process works like this: The investor will open an account on the site and deposit a sum of money to fund their loans. Loan applicants will post a financial profile and be assigned to a risk category, which affects the interest rate they will have to pay to borrow.

The applicant may then receive loan offers from one or more investors and accept one of them. (Some applicants break up their requests into chunks and accept multiple offers.) The money transfer to the borrower and the monthly loan payments to the lender are handled through the platform. The process can be entirely automated, or lenders and borrowers can choose to haggle.

Some sites specialize in particular types of borrowers or loans. Funding Circle, for example, focuses on small businesses.

• Kiva, a nonprofit, allows investors to support entrepreneurs and others in the U.S. and around the world, many without access to traditional lending institutions.
• LendingClub has a "Patient Solutions" category that provides loans and payment plans for medical and dental care.