Peer-to-Peer Lending

Peer-to-peer lending platforms match people who want to lend money with those who want to borrow. Borrowers can sometimes get lower rates than from banks, and lenders can earn higher returns than from savings accounts. The platform assesses borrowers, sets interest rates, collects repayments and charges fees.

Lenders often spread their money across many loans to reduce risk. For example, an investor might lend 1,000 spread across 50 different loans of 20 each, so that a single default has only a small effect.

Peer-to-peer lending grew rapidly from the mid-2000s, especially in the United Kingdom, the United States and China. Many platforms later shifted towards funding from institutional investors, and some closed or left consumer lending.

The risks for lenders are significant. Borrowers may default, and in a recession defaults can rise sharply. Unlike bank deposits, money lent through these platforms is usually not protected by deposit insurance. If a platform fails, recovering loans can be difficult. China’s peer-to-peer lending sector collapsed after widespread fraud and defaults, leading authorities to shut it down.