Peer to peer lending could also be called people to people lending. At the very simplest this is a way for ordinary people to request a loan and for other everyday ordinary people to partially or fully fund the loan. So how does peer to peer lending work?
Usually it’s administered by a company like Lending Club or Prosper. If you will imagine these companies acting as the central marketplace where lenders and borrowers come to meet. Just like if a borrow were to request a loan online from a bank, they would go to one of the previously mentioned websites and request a loan. Here is where things take a turn for the better. Instead of some big powerful bank with unlimited power determining whether a loan will be approved or not, it is left up to the community of peers who are also lenders/investors in these private loans.
Each of the investors are able to review loans submitted as well as any credit report information provided with the loan. Investors choose to lend as little as $25 up to the full amount of the loan. When the loan is funded and the identity is verified by the administration company (Lending Club for example). Then the borrower will receive the funds and begin making monthly payments to the administration company; who will redistribute funds proportionally to each investor plus the interest earned for providing the loan.
To recap peer to peer lending is a model of lending based on receiving loans form a community of individuals versus directly from a bank. There are huge advantages to this model for the borrows and the lenders both.