P2P lenders find a marketplace they like, deposit the cash to invest, and start lending. Usually the marketplace will have you fill out your own application detailing the level of risk you're willing to take on and what types of loans you'd prefer to make.
From there, you log in, view available loans, and choose whether to invest. Some marketplaces will grade the loans by risk, but all of them should give you some level of information about the borrower. Some marketplaces also allow you to invest in a pool of similar loans.
How safe is peer-to-peer (P2P) lending?
Credit risk is the key factor for P2P lenders. As stated previously, many P2P borrowers couldn't qualify for a traditional bank loan and are turning to P2P lending as an alternative. That said, traditional banks aren't necessarily great at determining credit quality of an individual.
Bank credit standards have been mostly the same for the past 50 years. The underwriter checks debt and income, evaluates collateral, looks at the credit score and credit history, and then often makes a subjective decision.
Financial technology (fintech) companies are exploring alternative credit scores, grading loans based on unconventional criteria, and being more flexible with interest rate ranges to match credit risk.
Despite all of this, there will always be P2P loan defaults. Almost every type of loan product has credit risk and has to deal with defaults. The best way to mitigate risk in this type of fintech is with diversification. If you invest $50,000 into P2P lending, it's better to spread it across 10 borrowers who need $5,000 than to blow it all on one borrower. That way, if one defaults, you'll still be making money from the others.
