Investing in Peer-to-Peer Lending: Risks and Rewards

February 22, 202410 min read
Investing in Peer-to-Peer Lending: Risks and Rewards
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Peer-to-peer lending isn’t new. Its roots trace back centuries, evolving from local practices to global online platforms.
  • P2P lending offers diverse loan types and attracts investors with its low entry barrier, potential for high yields, and monthly income.
  • Successful P2P investing requires diversification, careful platform selection, and a strategic focus on creditworthy borrowers. But it’s important to consider the illiquid nature of P2P loans and their sensitivity to economic climates.

As cutting edge as it now sounds, the underlying concept supporting peer-to-peer (P2P) lending has been around for centuries. While the Financial History Review cites examples of the practice in pre-industrial France as some of the earliest instances of P2P loans, it can be reasonably argued people have always engaged in lending and borrowing. 

The difference today is the practice is no longer limited to agreements between individuals who reside within immediate physical proximity of one another. The proliferation of the Internet has spawned online platforms upon which people lend and borrow. This, in turn, has led to global opportunities for investing in peer-to-peer lending.

David Nicholson, one of the founders of what is regarded as one of the first P2P lending platform, Zopa, is quoted in a Bank of England Working Paper as having been inspired to develop an alternative to the banks that were sitting between depositors and borrowers. While the lending process looked somewhat complicated from a distance, Nichols realized the basic mechanics were quite simple, particularly since he and his partners could leverage the internet to bring lenders and borrowers together. 

How P2P Lending Works

Platform aside, P2P lending is basically a transaction between two parties — the lender and the borrower. Lenders, also known as investors, are looking to earn a profit on the loan, while the borrower uses the funds for whatever purpose they deem necessary. In most cases, P2P lending is based upon fully amortizing, fixed-rate loans. Interest rates remain constant for the term of the loans and payments are made in equal installments according to set schedules.

A borrower submits an application covering basic information such as the requested loan amount, the purpose of the loan and an agreement to an evaluation of their credit history. Loan terms average between three and five years. Interest rates average 6.99%.

Borrowers are rated according to “credit grades,” of which there can be as many as 12. Rating parameters include the borrower’s FICO score, their debt-to-income ratio, the amount of the loan, the purpose of the loan and the desired loan term. The minimum credit score is generally in the mid-600 range. Individuals with recent bankruptcies, judgments and/or tax liens are precluded from borrowing. In other words, applications from sub-prime borrowers are usually turned down.  

Investors can fund entire loans or parts of loans. The latter is usually recommended, since it reduces the risk of your entire investment going sideways if a single borrower defaults. Such notes can be had for as little as $25 each. Administrative activities handled by the platform include underwriting, as well as closing and distributing loan proceeds. The platform also manages lender remuneration. These services are provided in exchange for a 1% administrative fee. Some investors report average annual returns of more than 10%.

P2P Loan Types

Loan types vary from platform to platform. However, the most common kinds are personal, auto, business, mortgages and refinancing, student loan refinancing and medical. 

• Personal loans are the most common type offered by P2P platforms. These are generally used to consolidate debt, or finance home improvements and the like. The cap on personal loans is $35,000 on most sites.

• Auto loans from P2P sites are not necessarily referred to as car loans per se. However, with a personal loan ceiling of $35,000, the purchase of an automobile with the funds is more than possible. This can be a particularly attractive prospect for a borrower, as the car does not have to be pledged as collateral to secure the loan. 

• Business loans secured from P2P sites tend to have more relaxed requirements than those from banks. They also require less documentation. Still, they aren’t really a source of startup cash, as most sites require borrowers to have a track record of at least six months. Some platforms will lend as much as $500,000 in this area. These loans are often collateralized by a general lien on the business. 

• Mortgages and refinancing offered by P2P platforms usually apply to owner- occupied residences — either primary or secondary. Applications for funds to purchase rental properties or buying into a co-op are usually turned down. Borrowers are asked to provide a 10% down payment and the purchase of mortgage insurance is not a requirement. Loan origination fees are not charged, and the cap is typically $3 million. 

• Student loan refinancing is another specialty of the P2P marketplace. Students can combine up to $500,000 in student loans from multiple lenders, assuming their credit history and income will support such a decision. In addition to income and credit history, many of the P2P platforms operating in this area look at career experience and education.

• Medical loans can be applied to dental work, fertility treatments, hair restoration and weight-loss procedures, most of which are excluded from coverage by typical insurance policies. Loan amounts can be as much as $32,000, with terms from two to seven years. 

Pros & Cons of P2P Investing

As with any other type of investment, there are upsides and downsides of which to be aware. In the case of P2P investing, the upsides include:

• Low Barrier to Entry – A P2P portfolio can be created with a minimal amount of capital, making it one of the least costly forms of investing in which to participate. 

• Monthly Income – Investors are paid every month when borrowers make payments on their loans. This means a solid portfolio of P2P loans can generate a steady stream of passive income. 

• Higher Yields – Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields. A carefully curated portfolio of loans can potentially earn 10% annually or better. 

• Specific Control – Investors can determine the types of loans they’ll fund, as well as the term, credit score range and debt-to income ratio of borrowers with whom they are willing to work. Some platforms offer tools for automating this process, so an investor can set specific guidelines and turn their attention to other matters.

• IRA FriendlinessSome platforms offer lenders the capability of setting up a standard IRA, a Roth IRA or rolling over a 401(k). This offers tax advantages in that gains can be deposited directly into these accounts.  

• Loan Diversification Investors have the option of funding entire loans or purchasing notes in increments as small as $25 each to spread risk across a variety of loans. 

The downsides to consider include:

• Potential DefaultsAs you may have observed above, the vast majority of P2P loans are unsecured. This means they have no collateral backing them. Further, these are loans to individuals. Your investment will evaporate if a borrower defaults, especially if it’s early in the term of the loan. 

• No FDIC Protection – Investors are not reimbursed by the Federal Deposit Insurance Corporation when P2P platforms fail. Nor does the FDIC cover investor losses if a borrower defaults. Some platforms do have agreements with other platforms to manage loan portfolios if they go out of business, but there are no guarantees. 

• Capital Depletion – Principal and interest payments on loans are recovered simultaneously. This is different from traditional securities in which the total amount of your original capital is returned at the end of the term. This places the onus on the investor to separate principal and interest as payments are made or reinvest the proceeds altogether. 

• Lack of Liquidity – As of this writing (February 2023), the secondary market for P2P loans are practically non-existent. For this reason, a P2P investment is best thought of as a buy-and-hold proposition. You’ll have to offer a rather significant discount to find someone willing to buy a portfolio P2P of loans from you.

Balancing Risk and Reward

As with any other investment vehicle, a common approach to minimizing risk is diversification. Toward this end, shares in loan packages can be purchased for as little as $25 each. This means a $1,000 investment can theoretically be spread over 40 loans. In addition to scattering your investment over a number of different loans, you can employ a variety of P2P platforms. After all, peer-to-peer lending sites do go under from time to time. With all of your dollars in a single vessel, your entire investment could founder if it sinks. 

Diversification also means spreading your capital over a broad range of credit grades. One of the fundamental aspects of investing is the fact that risk and reward tend to go hand in hand. Generally speaking, the more risk you’re willing to assume, the greater the potential reward you could reap. While focusing only on the top credit tiers can potentially ensure minimal risk, your yields will be less significant than if you branched out into some lower-grade loans. With that said, you do want to avoid potentially higher risk categories.

Finally, you’ll want to keep P2P ventures to a relatively small percentage of your fixed-income investments. While the potential for a double-digit return is quite enticing, committing your entire portfolio to that pursuit is asking for disaster. 

Reinvesting your loan payments may  also be critical to the successful execution of a long-term P2P strategy. Remember, these loans are self-amortizing. This means returns diminish as loans get closer to term. Moreover, your principal is repaid in installments — along with the interest.  Continually purchasing new notes is central to staying fully invested in P2P lending.


Although P2P lending has been around for centuries, it is still a relatively new industry that is yet to be fully regulated. This means that as an investor you need to be careful when selecting a platform to invest in, and you should understand the regulations that govern P2P lending. In the US, the SEC only started regulating P2P lending platforms in 2008. So it’s a young industry in terms of regulation and rules. It’s essential to check whether the platform you’re considering investing in complies with the relevant regulations to ensure that your investment is protected.

In 2016, New York state issued “warning letters” to 28 P2P lenders, threatening to require them to obtain a license to operate unless they complied with demands to disclose their lending practices and products available in the state. This serves as a reminder that investors should carefully research the platform they are considering and understand the regulations that govern P2P lending in your state.

In other words, understanding the regulations can also give you more confidence in the platform and help you make informed decisions.

Is P2P Investing For You?

It is important to understand the risks of any investment asset. This is particularly true when it comes to P2P investing. After all, the foundation of these investments is unsecured loans to individuals. 

Yes, peer borrowers are pretty well vetted and you’re given a relatively good idea of their ability to service the debt. However, human beings don’t always perform as expected. Moreover, a sharp economic downturn, such as the one brought about by the COVID-19 pandemic, could trigger a collapse if people are unable to earn money to repay the loans. 

These are important considerations to ponder as you’re weighing the pros and cons of adding a P2P lending component to your portfolio. A good rule of thumb here is to invest no more than you can comfortably afford to lose altogether. 

Invest in Alternative Assets

Get consistent returns in times of market volatility.

P2P Alternatives

There exists a broad range of alternative investments capable of generating better returns than the market in general. Yieldstreet, for example, offers a wide variety of opportunities to earn passive income with investments as small as $500. 

Opportunities exist in classes that have been known to generate returns for decades, but have typically been closed off to retail investors. These include art finance, real estate, commercial finance and legal finance. What’s more, many of these are backed by collateral to provide some degree of protection for your capital. And like with P2P lending, you can enjoy short durations ranging from six months to five years. 

Target yields have historically been in the 7%-15% range, but will vary depending on the specific investment opportunity. You can see all of the details of Yieldstreet’s current and past investments here. Also check out how Yieldstreet is different from P2P lenders here.


To get the most out of P2P investing, while minimizing risk exposure, you may need to diversify your holdings and lean toward borrowers with the highest credit ratings and lowest debt-to-income ratios. 

Choosing your platform carefully is also highly recommended. All P2P lending platforms are not created equally and they tend to specialize in certain areas. You might feel more comfortable with one or two over others.

It’s also important to bear in mind P2P investments tend to be illiquid. You’ll often have to wait for the loan to mature to get all of your principal back, as well as earn your full gains. And finally, the performance of this asset class depends heavily upon the economic climate. Downturns tend to affect the class negatively, so you’ll want to get a good read on the economy as part of your research before you invest.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure