What Is Peer-to-Peer Lending and How Does It Work?

Peer-to-peer lending, or P2P lending, is a way to borrow money through an online platform that connects borrowers with investors.

Instead of a traditional financial institution providing all the money, individuals or other investors help fund the loan. The platform usually handles applications, credit assessments, payments and loan servicing.

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How Does Peer-to-Peer Lending Work?

The process usually works like this:

1. You apply for a loan through a P2P lending platform.

2. The platform reviews your financial and credit information.

3. You receive a loan offer with an interest rate and repayment terms.

4. Investors fund some or all of the loan.

5. You receive the money.

6. You make scheduled payments until the loan is repaid.

The platform acts as the middleman between the borrower and investors.

What Can a Peer-to-Peer Loan Be Used For?

Depending on the lender, a P2P loan may be used for:

• Debt consolidation

• Home improvements

• Emergency expenses

• Large purchases

• Business expenses

• Other personal expenses

Check the loan agreement because some providers may restrict how the money can be used.

What Determines Your Interest Rate?

Your rate can depend on factors such as:

• Credit score

• Credit history

• Income

• Existing debt

• Loan amount

• Repayment term

Borrowers considered higher risk may receive higher interest rates.

Always compare the total borrowing cost before accepting a loan.

Peer-to-Peer Loan vs. Traditional Personal Loan

The biggest difference is where the funding comes from.

A traditional personal loan is generally funded by a bank, credit union or lending company.

A P2P loan uses an online platform to connect borrowers with investors who provide the funding.

From the borrower's perspective, both can still involve a fixed loan amount, interest charges and scheduled repayments.

What Are the Benefits of Peer-to-Peer Lending?

Potential advantages include:

• Online applications

• Access to another source of borrowing

• Potentially competitive interest rates

• Fixed repayment schedules

• Options for borrowers who want alternatives to traditional lenders

The actual terms depend on the platform and your financial profile.

What Are the Risks?

Peer-to-peer loans are still debt.

Possible disadvantages include:

• High rates for borrowers with weaker credit

• Loan origination or service fees

• Credit checks

• Late payment consequences

• Damage to your credit if payments are missed

P2P platforms can also operate under different regulatory requirements depending on how their lending and investment structure is set up. In Ontario, for example, certain P2P arrangements may fall under securities laws.

Is Peer-to-Peer Lending Available in Canada?

Yes, marketplace and peer-to-peer lending models can operate in Canada, although the market is smaller than traditional bank lending.

The rules can depend on the type of platform and province. Lending, consumer protection and securities requirements may all apply depending on how the service is structured.

Before using a platform, review who is providing the loan and which fees or regulations apply.

Is Peer-to-Peer Lending a Good Idea?

It can be worth considering if the loan offers a competitive rate and repayment terms you can comfortably afford.

Compare it with other options before borrowing, including:

• Personal loans

• Lines of credit

• Secured loans

• Other short-term borrowing options

The most important factor is not whether the money comes from a bank or individual investors. Compare the interest rate, fees, repayment period and total amount you will repay.