What is Peer-to-peer Lending?

Peer-to-peer lending (P2P lending) is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. This lending model connects borrowers directly with individual lenders through online platforms, facilitating loans for various purposes such as personal loans, business ventures, or educational expenses. P2P lending platforms operate by assessing the creditworthiness of borrowers, setting interest rates, and managing loan transactions. Borrowers typically benefit from more competitive interest rates compared to traditional banking systems, while lenders can achieve higher returns on their investments.

The process begins with borrowers submitting loan applications on a P2P platform, which then evaluates their credit profiles and assigns risk grades. Lenders review these profiles and choose to fund loans based on their risk tolerance and investment criteria. The platform handles the disbursement of funds and subsequent repayment collections, distributing payments to lenders as borrowers repay their loans. P2P lending democratizes access to credit and investment opportunities, often providing financial services to underserved or unbanked populations. However, it also carries risks such as borrower default and platform insolvency, necessitating careful consideration by participants.