People who invest their money by making peer-to-peer, or P2P loans, generally get higher returns than they would receive from a bank certificate of deposit, can choose to whom they are lending money and know how it is spent, and get a sense of community and charity from helping borrowers, notes Investopedia. Borrowers with P2P loans get lower interest rates than those of banks and have choices regarding how to apply for loans.
People wishing to lend or borrow through a P2P loan work through companies that act as intermediaries, states Investopedia. Lenders can choose specific borrowers in whom to invest by bidding on their loans, or they can request that the P2P company spread their money across borrowers that meet specific criteria. The more risk a P2P lender takes during the loan process, the greater his chance of high returns. Lenders do run the risk of defaulted loans, and most P2P loans are not insured.
P2P companies do personal, employment and credit checks on prospective borrowers and assign risk levels for accepted borrowers, states Investopedia. Borrowers have the options of accepting bids from lenders or borrowing money based on the interest rate assigned to their risk group that day. Borrowers can set the interest rate for their loans, and in cases in which multiple parties are interested in lending, they can receive a lower rate if lenders continue to bid down to win the loan.