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Peer-To-Peer Lending: How To Make Money From It

Peer to peer lending, also called P2P lending, is a relatively new financial practice where borrowers can borrow money at lower interest rates without going through a bank or other traditional financial institutions.

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So if you’re in a pinch and you can’t borrow money from the bank for some reason, you can borrow money through peer to peer lending companies or apps.

But did you know that you can also lend money and make some side cash out of it?

In today’s article, I’ll talk about peer to peer lending and how you can make money from it.

What Is Peer-To-Peer Lending?

Peer-to-peer lending is a relatively new financial practice that involves lending money to borrowers (individual or business) from lenders through online applications that match borrower to lender.

Lenders are where the funds come from, and the incentive for them to lend is that they earn interest on the amount that they lend.

What is P2P Lending

Peer-to-peer lending platforms take care of processing and accepting loan applications and payments and take a fee for originating the loan, as well as some of the interest that the borrowers pay on the loan.

Borrowers use peer-to-peer lending because it’s quicker and more accessible; it’s as simple as opening an app or internet browser. Plus, this is a good alternative if they need to borrow money for personal loans, debt consolidation, or to fund their small business.


The advantages for the borrower are more apparent. P2P lending doesn’t require the typical underwriting process, so the credit score requirements aren’t as strict as those of traditional banks or lending institutions.

Borrowers also benefit from favorable loan terms, fewer fees, and lower interest rates, plus you can look for the best P2P lending companies with the best rates without impacting their credit scores.

The peer-to-peer lending model is also favorable to lending companies because they don’t need to spend on infrastructure. Because costs are low, they can lower the fees and offer more competitive interest rates.

Because there are plenty of loans to choose from, lenders can easily pick and choose which loans to invest in and diversify their investments.

Plus, lenders get to invest in a growing market that’s estimated to be worth billions and even hundreds of billions in the next 5 years.


For borrowers who have not-so-great credit scores, the interest rates tend to be higher than others.

Also, getting a loan to cover a debt only compounds the problem if there’s no attempt to curb unnecessary spending.

For lenders, it’s an investment that is not without risks. If a borrower defaults on a loan, there’s no way you can recoup that investment because it’s not insured by the federal government.

Investing in plenty of loans sounds like a great plan in theory, but it’s not easy to keep track of multiple loans, especially when they number in the hundreds.

Types of P2P loans

Different peer-to-peer lending sites offer different loan products. Here are some examples of what they offer:

Personal Loans. Fixed-rate, unsecured (i.e., no collateral) personal loans are the most common loans offered by P2P lending companies.

Depending on the applicant’s credit score, they can borrow up to $30,000 to be paid between 3 to 5 years.

Personal loan proceeds can be used for anything from debt consolidation, home improvement, or to repay a medical debt.

Business Loans. For borrowers who need funding for their small businesses, many P2P lending companies now offer them.

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The payouts are usually larger than what banks offer, although interest rates by P2P lending are also higher.

Home Improvement Loans. Some homeowners who are thinking of selling their house might want to work on the house first before they sell it. Others may simply be required to work on the house due to damages that require repairs and upgrades.

Either way, chances are they’re going to be looking for a loan as a means to work on their home.

Home Improvement

Student Loan Refinancing. Student loans are no picnic to pay, and if it’s at all possible to refinance it and negotiate a payment schedule that’s more convenient, students will look for a loan to allow them to do that.

Healthcare Loans. Taking out a personal loan to repay a medical bill is certainly an option, but some P2P lending companies offer loans that are specific to healthcare costs and medical expenses.

Auto Refinancing. Whether it’s to lower monthly payments, reduce interest rates, or adjust loan terms, car owners sometimes look to refinance their car loans.

How Do You Make Money From Peer-To-Peer Landing?

So the next thing you need to know is whether it’s possible to make money by being a peer-to-peer lender/investor.

The answer is yes, it’s possible.

And the next question is, how much?

The answer isn’t that simple.

How much you make from P2P investing depends on how much you invest, how many loans you invest in, and the type of loans you invest in.

Borrowers who are less risky qualify for lower interest rates compared to borrowers with not-so-perfect credit histories.

Thus, investing in low-risk loans gets you lower returns than high-risk ones, as with most investments.

But how do you know which borrowers are likely to default on their loans (i.e., not pay their loans)?

Banks spend millions on entire departments to calculate risks and predict which borrowers will pay them back and who won’t. But P2P lending companies don’t have this kind of manpower.

How To Balance Rewards And Risk

Even without a definite way to vet risks per borrower, it’s definitely still possible to make money from being a P2P investor.

Here are some strategies to maximize returns and minimize risks.

Spread your investment out among many different loans. Don’t keep your eggs in one basket, as the saying goes. Distribute your investment among many different loans.

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For instance, if you have $1000 to invest, it’s better to invest as little as $25 in 40 different loans instead of investing the entire $1000 in a single loan.

Be prepared to invest in hundreds of loans. This way, even if you lose money on one loan, you have hundreds of others to compensate for that loss.

Diversify. It’s important to distribute your investment among many different loans, but it’s also important to distribute your investment among different types of loans.

Don’t focus on only one loan grade, such as investing only in mid-risk loans. Invest in different loan grades: low-risk, mid-risk, high-risk loans, and all the ones in between.

Although you’re more likely to earn money from personal loans, do your best to disperse your investment to different types of loans, such as business loans or student debt restructuring loans.

Don’t be afraid to also invest in loans in different lending companies, as they offer many different kinds of loans and cater to many different borrowers.

Reinvest. When you receive your loan payments in your account, you can wait for them to accrue, pull them out, and spend them.

But a much better way to maximize your returns is to immediately reinvest the loan payments you receive. The idea is to stay fully invested and give your money all the chances to grow.

If you’re able to balance your rewards and risks, it’s possible to earn annual investment returns of greater than 10% and even up to 15%, but the more common annual returns reported are in the range of 4% to 8%.

How To Be A Peer-To-Peer Investor

In a nutshell, peer-to-peer lending platforms let investors buy consumer debt hoping to make some money on that transaction, and let investors pick and choose which loans they want to finance.

The specific steps may vary per company, but here are the general steps of how to be a peer-to-peer investor.

1. Check the qualifications and requirements.
The Securities and Exchange Commission (SEC) has some minimum standards for investors in P2P. These include:

  • At least $70,000 gross annual income (except California, where you need to have $85,000 gross annual income), and a net worth minimum of $70,000
  • Residence in an approved state; this differs depending on the P2P platform you choose to trade in
  • Bank account to receive loan payments

2. Download the apps or access them through your internet browser.
The next section includes a list of the best lending apps to start investing in.

I would recommend reading up on all of them so you can study the requirements of each lending company and find out which ones you’re eligible to invest in and which ones fit the kind of investments you’d like to make.

You don’t even have to choose just one. If you have enough funds to invest, you can certainly choose to invest through more than one lending company.

3. Browse available loans.
As I’ve mentioned, different peer-to-peer lending companies offer different loan products and different loan grades at different interest rates.

Go over the loans and the borrowers carefully, especially if this is your first time to invest.

4. Invest in your chosen loans.
The exact procedure for this varies among different P2P providers. In general, select which loan you want to invest in and input the amount you want to invest.

5. Reassess your investment strategy over time and adjust as needed.
Even if you follow the advice I gave in the previous section to balance your rewards and risk, there are still times when your specific strategy won’t work.

It seems like a lot of work, but monitor the loans that you’ve invested in so you have an idea which ones are earning and which ones have defaulted if any.

The Best Peer-To-Peer Lending Companies To Invest In

As I’ve mentioned, there are plenty of peer-to-peer lending companies to choose from. Here are the most established and popular ones that you can check out.

1. Lending Club

  • Must have a gross income and a net worth of at least $70,000 ($85,000 in CA). The income requirement is waived with a net worth of $250,000 or more
  • Minimum investment: $25 per note; $1,000 initial account balance requirement
  • Estimated APR: 6.95% to 35.89%
  • Personal loans up to $40,000
  • Loan terms of 36 or 60 months, based on loan amount
  • Fees: 1% of interest payment; $100 annual account fee for balances <$5,000
  • Assets: Invest in 30 different credit grades; Credit ratings from A1 and 55 for multiple loan types
  • Automated investment available

Lending Club is the current market leader with a 45% share.

They offer four different types of loans: personal loans, business loans, auto refinancing, and patient solutions.

They also have an automated solution for investors who don’t want to pick loans manually, allowing diversification at a click of a button (or tap of the screen).

In addition, they have a comprehensive resources page to learn more about investing with them and coming up with the right strategy to maximize your earnings.

2. Prosper

  • Must have a gross income and a net worth of at least $70,000 ($85,000 in CA). The income requirement is waived with a net worth of $250,000 or more
  • Minimum investment: $25 per note
  • Estimated APR: 6.95% to 35.99%
  • Personal loans up to $40,000
  • Loan terms of 36 or 60 months
  • Fees: 1% annually of borrowed principal balance
  • Assets: Invest in 7 different credit ratings for multiple loan types
  • Automated investment available

Founded in 2006, Prosper is the original P2P lending platform in the US.

There are 7 different risk categories, from AA (high credit rating) to HR (high-risk). You can spread out your investment across these 7 risk categories.

They offer many different types of loans; aside from the usual types, they offer baby and adoption loans, engagement ring financing, and even green loans, where you can get financing for switching to a sustainable lifestyle, such as installing solar panels, energy-efficient roofs, or a water preservation system.

3. Upstart

  • Must be an accredited investor (income of $200,000 or more in the last two years or net worth of $1 million or more)
  • Minimum investment: $100
  • Estimated APR: 21.5%
  • Personal loans up to $50,000
  • Loan terms of 36 or 60 months
  • Fees: none for investors; if loan defaults, Upstart turns the origination fee over to investors
  • Assets: Invest in personal loans with a credit rating of AAA to E
  • Automated investment available

Upstart is a relatively new company started by three former Google employees.

What makes this P2P company truly unique, though, is how they determine risk. While other P2P companies use a borrower’s FICO score, Upstart created a system that uses artificial intelligence/machine learning (AI/ML) to assess a borrower’s risk factor.

In addition to the usual FICO score determiners, such as payment history, current debt level, length of credit history, and types of credit used, Upstart’s AI/ML factors in a borrower’s educational attainment, field of study, GPA, and employment background as well.

This results in a more accurate risk assessment and mitigation. Accordingly, they have the lowest delinquency rate of the three lending platforms I’ve mentioned here, with 89% of their loans either current or paid in full.

A drawback is that investors cannot choose individual loans to invest in; investors must choose a specific loan grade or loans with specific criteria and Upstart will randomly assign you loans that meet these criteria.

The Peer-to-Peer Lending Bottom Line

In summary, investing in peer-to-peer lending can earn you some money as passive income, but as with any investment, there’s risk involved.

Minimize risk by diversifying your investments, frequently monitoring your loans, and only investing with money that you can afford to lose.

Other resources

Want to know about other ways to earn passive income? Here are 25 passive income ideas.

Or maybe you want to know about earning money without doing too much. Here are 14 everyday things that can make you some money.

We’d like to hear from you!

Do you have experience with peer-to-peer lending apps, whether as a borrower or a lender? How was it? Do you have any tips to help first-time borrowers or lenders? Share it with everyone in the comments!

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