P2P lending: how it works, risks and reality

Have you ever wanted to borrow money without going to a bank? Welcome to the world of P2P lending — a fintech revolution that has been around since 2005.

Essence: people borrow from people

P2P (peer-to-peer) or peer-to-peer lending is when investors directly lend to borrowers through a platform, without the involvement of a bank as an intermediary. Websites like Prosper, Lending Club, and Upstart act as arbitrators: they match pairs, set rates, and monitor payments.

High interest rates are a warning sign. The rates for P2P loans are usually much higher than those of banks because the risk is greater.

Where's the catch?

Here is an honest conversation:

Defaults are the main problem. Studies show that the default rate on P2P platforms exceeds 10%, while in banks this figure is much lower. That is, out of every 10 borrowers, at least one may default on you.

For investors: your money gets stuck in risky assets when there are safer options like savings accounts, CD certificates.

For Borrowers: Predatory rates make debt even heavier. People turning to P2P loans are often already in trouble — living paycheck to paycheck.

Withdrawal

P2P lending is indeed an innovation. But it's not magic. For investors, it's speculation; for borrowers, it's a last resort. Taking a P2P loan makes sense only in extreme situations when there are no other options.