In 2019, I invested $500 to test peer-to-peer lending, which promised mid-single-digit returns by cutting out the bank. Two years later, after accounting for defaults and taxes, my net return was 3.2%. Not terrible — it beat a savings account — but nowhere near the 7% I’d expected, and it came with far more risk than I’d realized going in.
The short answer
Peer-to-peer lending (P2P lending) is a model where you, as an individual investor, fund unsecured personal loans to borrowers through an online platform. The platform handles underwriting and servicing; you earn interest as borrowers repay. Advertised returns vary widely by borrower risk tier, but real returns after accounting for defaults, fees, and taxes typically fall well below advertised rates — with significant risk of principal loss and no FDIC insurance or federal protection.
How peer-to-peer lending works
P2P lending platforms act as marketplaces. Borrowers apply for personal loans (usually unsecured, meaning no collateral). The platform reviews their credit, assigns a risk rating (typically A through HR, with A being lowest-risk), and lists the loan for funding.
As an investor, you choose which loans to fund — either manually selecting individual loans or using an automated allocation feature that spreads your money across hundreds of loans based on criteria you set. You can invest as little as $25 per loan on most platforms.
When a borrower makes a monthly payment, a portion of that payment (principal plus interest) flows to you. The platform takes a servicing fee — typically around 1% of the loan amount annually — and you receive the rest.
The key distinction: you own a fractional stake in each loan. The platform does NOT hold the loans; you do. If the borrower defaults, you lose that portion of your investment. There’s no FDIC insurance, no government guarantee. This is a direct credit risk.
What real returns look like after losses
Platforms advertise returns based on gross interest rates — the rate borrowers pay. Prosper, one of the longest-running P2P platforms, publishes historical performance data showing that returns vary significantly by loan rating tier, with higher-risk loans offering higher advertised rates but also carrying substantially higher default rates.
But those are gross figures. Real returns require subtracting:
Loan defaults. Academic research on P2P lending has consistently shown that net returns fall well below advertised rates once losses and fees are factored in. During economic downturns, charge-off rates spike significantly, and investors who held riskier loan tiers have seen portfolio values drop by double digits.
Platform fees. Most platforms charge around 1% annually as a servicing fee. On a modest gross return, that’s a meaningful percentage point gone before you see a dollar.
Taxes. This is the part that surprised me most. Interest from P2P lending is taxed as ordinary income, not capital gains. According to IRS Publication 17, you’ll receive Form 1099-INT from the platform reporting your interest income, which must be reported on Schedule B of your tax return. If you’re in the 24% federal tax bracket, a 6% return becomes roughly 4.5% after federal tax. Add state and local taxes, and you’re down further.
Illiquidity costs. Unlike stocks or bonds, you can’t sell a P2P loan instantly. Some platforms offer secondary markets where you can list your loans for sale, but during economic stress — like March 2020 — those markets freeze. Investors who needed cash had to either hold or accept steep discounts.
Put it all together: a loan advertised at 8% might net you a much lower return after defaults, fees, and taxes — if you diversified well and didn’t need to exit early. Casual investors who chased high-yield loans often underperformed significantly.
The regulatory squeeze that reshaped the industry
What most promotional P2P content won’t tell you: the regulatory landscape has fundamentally changed how these platforms operate, and not in retail investors’ favor.
P2P platforms initially operated under securities law exemptions, registering loan notes with the SEC and operating as broker-dealers or under Regulation D private placement rules. But SEC scrutiny intensified around platform solvency, investor protection, and disclosure requirements. The regulatory burden — combined with modest retail investor returns — made the pure-play P2P model less attractive to operate.
LendingClub’s 2024 exit from consumer P2P wasn’t just a business pivot; it was a symptom of a larger industry contraction. The model that promised to “democratize lending” found that serving retail investors at scale, under securities regulations designed for more sophisticated markets, wasn’t economically sustainable compared to serving institutional investors under traditional banking frameworks.
What this means for you: platform risk is structural, not speculative. The business model itself is under pressure. If you’re investing in P2P lending, you’re betting not just on borrower creditworthiness, but on the platform’s long-term commitment to the retail investor model.
P2P lending platforms compared
The U.S. peer-to-peer lending landscape has contracted sharply in recent years. Here’s what’s still operating and what changed:
Prosper — the oldest U.S. P2P platform (founded 2006) and the primary remaining pure-play option for retail investors. Minimum investment: $25 per loan. Offers automated allocation tools and a secondary market for selling loans early (though liquidity varies). Available in most states, with some restrictions. Prosper publishes historical performance data by loan rating tier on its investor resources page.
LendingClub — once the largest P2P platform in the U.S., LendingClub exited consumer peer-to-peer lending in 2024. The company pivoted to a traditional bank lending model and no longer allows retail investors to fund individual borrower loans. Existing LendingClub investors were left with the secondary market as their only exit option. If you’re reading old articles that recommend LendingClub, know that the consumer P2P product no longer exists.
Upstart — an AI-driven lending platform, but not a true P2P marketplace. Upstart originates loans and sells them to institutional investors; individual retail investors cannot buy or trade loans on a secondary market the way they could with Prosper or LendingClub. It’s a lender, not a P2P platform in the original sense.
Others (Best Egg, SoFi, LendingTree) — these are loan marketplaces that match borrowers to banks or institutional lenders. They don’t offer peer-to-peer investing to retail individuals.
The shrinking field means platform risk is real. If Prosper were to exit the consumer P2P business the way LendingClub did, investors would face forced exits or long holding periods with no reinvestment option.
P2P lending risks
This is the section most promotional content glosses over. Here’s what can go wrong.
Principal loss. Borrowers default. Unlike a bank savings account (FDIC-insured up to $250,000) or even a corporate bond (which has bankruptcy priority), P2P loans are unsecured personal debt. If the borrower stops paying, you lose money. Even the safest loan tiers have experienced meaningful cumulative default rates historically. The riskier tiers can see significantly higher losses.
Liquidity risk. You cannot instantly cash out. P2P loans have 3- to 5-year terms. If you need the money before that, your options are: (1) wait for monthly repayments to trickle in, or (2) sell on the secondary market, often at a discount. During the 2020 economic panic, some Prosper investors reported being unable to sell loans at any price for weeks.
Platform risk. As mentioned, LendingClub exited consumer P2P in 2024. Prosper is now the dominant remaining option. If Prosper were to pivot, merge, or shut down retail investor access, your loans wouldn’t vanish — they’d still be contractual obligations owed to you — but reinvestment and liquidity would dry up. You’d be in “run-off” mode, collecting payments until maturity with no way to redeploy.
Economic cycle risk. P2P lending is pro-cyclical. When the economy weakens, defaults spike. The 2020–2021 period showed this clearly: unemployment rose, borrowers missed payments, and charge-offs climbed. Investors who diversified and held through the cycle recovered as the economy reopened, but those who panicked and sold took permanent losses.
Interest rate risk. P2P loans have fixed rates. If market interest rates rise (as they did in 2022–2023), the value of your existing loans effectively declines — newer loans offer better returns, and your old loans are stuck at lower rates. You don’t see this as a marked-to-market loss the way you would with a bond, but it’s an opportunity cost.
Inflation risk. A modest nominal return loses purchasing power if inflation runs at several percentage points annually. P2P lending’s returns are modest enough that inflation can erode them significantly over time.
Tax drag. I mentioned this earlier, but it’s worth repeating: P2P interest is ordinary income. The IRS treats this as interest income reported on Form 1099-INT, taxed at your marginal rate. If you’re in a high tax bracket, the effective after-tax return can be barely above Treasuries, which carry zero credit risk. A modest P2P return taxed at a combined federal and state rate nets you significantly less.
Regulatory risk. P2P lending sits in a lightly regulated space. Platforms must register with the SEC or operate under exemptions, and some states restrict P2P lending entirely. Prosper, for example, doesn’t operate in all 50 states. Regulatory tightening could reduce returns, impose new compliance costs, or restrict access. FINRA has issued investor alerts about the risks of alternative investments like P2P lending.
These risks compound. You’re not just taking one risk — you’re taking credit risk, liquidity risk, platform risk, and economic risk all at once. That’s very different from a diversified stock or bond fund.
The interesting wrinkle: the LendingClub exit nobody saw coming
For years, peer-to-peer lending was framed as the future of finance — cutting out banks, democratizing credit, giving retail investors access to an asset class previously reserved for institutions. LendingClub went public in 2014. Billions of dollars flowed into P2P loans.
Then, in 2024, LendingClub exited the consumer P2P business entirely. The reason: returns for retail investors weren’t competitive enough compared to the operational complexity and regulatory burden. The company pivoted to a traditional banking model, partnering with institutional investors instead of crowdsourcing from individuals.
Retail investors were left holding loans with no reinvestment path. The secondary market became the only exit, and liquidity dried up. Some investors took losses just to get out.
The LendingClub exit was a reminder that P2P lending, for all its “future of finance” rhetoric, is still a business — and businesses pivot when the model doesn’t work. The idea that you can passively earn high returns forever by lending to strangers on the internet was always more aspirational than realistic.
What it means for you
Peer-to-peer lending is not a core portfolio building block. It’s a niche alternative asset with credit risk, liquidity constraints, and tax headwinds.
If you’re considering P2P lending, here’s the reality check:
You should have an emergency fund first. P2P money is locked up for years. If you need it early, you’ll take a loss.
You should already have a diversified portfolio. P2P lending doesn’t replace stocks, bonds, or index funds. At most, it’s a small allocation in a portfolio that’s already built.
You need to diversify within P2P. The standard advice is to spread across at least 100–200 loans. Anything less, and a single default can tank your returns.
You should stick to conservative loan tiers. Chasing the highest-advertised returns on the riskiest-rated loans is a recipe for losses. Most successful long-term P2P investors stay in the lower-risk tiers and accept more modest returns.
You need to be comfortable with illiquidity. If you might need this money in the next 3–5 years, P2P lending is the wrong vehicle.
You need to account for taxes. The after-tax return is what matters, and for many investors, that’s only slightly better than a high-yield savings account or short-term Treasuries — with far more risk. Remember: you’ll receive Form 1099-INT each year, and that interest goes on Schedule B as ordinary income.
Peer-to-peer lending isn’t the passive income miracle some promoters claim, but it’s not a scam either. It’s a niche credit investment with real risks and modest returns. If you go in with realistic expectations, diversify heavily, and treat it as a small slice of a larger portfolio, it can work. Just don’t mistake it for a core holding — and don’t invest money you might need back in a hurry.
FAQ
Is P2P lending safe?
P2P lending is not “safe” in the traditional sense — there’s no FDIC insurance, and you can lose principal if borrowers default. It’s riskier than bank deposits or Treasuries, though diversifying across many loans reduces (but doesn’t eliminate) risk. Historically, net returns after losses have been significantly lower than advertised gross rates.
What’s the average return on peer-to-peer lending?
Advertised returns vary widely depending on loan rating tier, but real returns after accounting for defaults, fees, and taxes typically fall well below advertised rates. Academic research has found that diversified investors often earn returns in the low-to-mid single digits net of losses. Higher advertised returns come with significantly higher default rates.
How much can you make from peer-to-peer lending?
That depends on how much you invest, which loan tiers you choose, and how many borrowers default. A diversified investment in lower-risk loans might net you a modest return after losses and fees, before taxes. After taxes, expect the return to drop further if you’re in a typical tax bracket. This is not a get-rich-quick strategy.
What happened to LendingClub?
LendingClub exited consumer peer-to-peer lending in 2024 and pivoted to a traditional banking model with institutional partnerships. Retail investors can no longer fund new borrower loans through LendingClub. Existing investors were left with only the secondary market as an exit option.
Are P2P lending platforms regulated?
Yes, but lightly. P2P platforms must register with the SEC as broker-dealers or operate under exemptions, and some states restrict or prohibit P2P lending. Prosper, for example, is not available in all 50 states. P2P loans are not covered by FDIC insurance or SIPC protection. The SEC and FINRA provide investor resources and alerts about the risks.
Can you lose money in peer-to-peer lending?
Yes. Borrowers default, and when they do, you lose that portion of your investment. Default rates vary by loan tier and economic conditions — higher-risk loans experience significantly higher default rates. Diversification reduces but does not eliminate this risk.
Is peer-to-peer lending a good investment?
That depends on your risk tolerance, time horizon, and tax situation. P2P lending offers modestly higher returns than savings accounts, but with significant credit risk, illiquidity, and tax drag. For most investors, it’s a secondary allocation at best, and only after building a diversified foundation in stocks, bonds, or index funds.
About the author
Quinn Sutherland is a personal finance writer and has tested peer-to-peer lending firsthand. They write about investing concepts and personal finance practices, not specific investment recommendations. See our disclaimer below.
Disclaimer {#disclaimer}
This is not financial advice. The author is not a financial advisor. This article explains peer-to-peer lending concepts for educational purposes and does not recommend any specific investment, platform, or strategy. It does not account for your personal financial situation, risk tolerance, or time horizon.
Tax disclaimer: Tax laws vary by jurisdiction. This article does not constitute tax advice. Consult a CPA or tax professional for your specific situation.