Investing in peer-to-peer (P2P) lending means funding personal or business loans directly through an online platform, earning interest as borrowers repay. The concept is straightforward, but the landscape for U.S. retail investors has narrowed significantly. Prosper is currently the only major P2P platform in the U.S. that accepts investments from individual, non-institutional investors. If you want to put money into P2P lending, here’s what the process looks like, what returns to expect, and what risks you’re taking on.
How P2P Lending Works for Investors
On a P2P platform, borrowers apply for unsecured personal loans. The platform evaluates their creditworthiness, assigns a risk grade, and sets an interest rate. As an investor, you browse available loans and choose which ones to fund. Most platforms let you spread your money across many loans in small increments, often $25 or $50 per note, so you’re not betting everything on one borrower.
When a borrower makes monthly payments, you receive a share of the principal and interest. The platform takes a servicing fee from your earnings. Your return depends on the interest rates of the loans you pick and, critically, how many of those borrowers actually pay back what they owe.
Where You Can Invest
The U.S. P2P investing market looks very different than it did a decade ago. LendingClub, once the largest platform for individual investors, stopped offering direct note investing to retail participants and shifted to a bank model. Other platforms have similarly moved toward institutional funding or shut down entirely. As of now, Prosper remains the primary option for individual investors who want to buy P2P loan notes directly.
Some investors look to international platforms or newer alternative lending marketplaces, but these come with additional regulatory complexity and currency risk. If you’re based in the U.S. and want a regulated, straightforward path, your options are limited.
Eligibility Requirements
You can’t necessarily invest just because you want to. P2P lending notes are registered as securities with the SEC, which means both federal and state rules apply to who can buy them.
Platforms are only available to investors in certain states. Prosper, for example, has historically been open to investors in roughly 30 to 35 states. Even in states where investing is allowed, you may need to meet financial suitability requirements: either $70,000 in annual income combined with $70,000 in net worth (excluding your home), or a net worth of at least $250,000. These thresholds vary by state and platform, so check the platform’s investor page to see if your state is eligible and what minimums apply to you.
Accredited investors, those earning over $200,000 individually (or $300,000 with a spouse) for two consecutive years, or holding a net worth above $1 million excluding their primary residence, typically face fewer restrictions and may have access to a broader set of investment options.
Expected Returns and Default Risk
P2P loans are unsecured, meaning there’s no collateral backing them. If a borrower stops paying, you lose that portion of your investment. This is the central risk of P2P lending, and it’s not trivial.
Interest rates on P2P loans tend to be high relative to traditional bank loans, averaging around 18% or higher in some datasets, because the borrowers often have moderate credit profiles or limited alternatives. But high interest rates don’t translate directly into high investor returns. Default rates in P2P lending can run as high as 27% of funded loans in some samples, which significantly eats into your earnings. After accounting for defaults and platform fees, net returns for investors have historically ranged from the low single digits to around 5% to 7% annually for well-diversified portfolios. Investors who concentrated their money in higher-risk loan grades sometimes earned more, but also faced steeper losses when defaults spiked.
Diversification is your main defense. Spreading your investment across hundreds of loans reduces the impact of any single default. If you put $2,500 into 100 different $25 notes, one borrower defaulting costs you $25 rather than your entire stake.
Tax Treatment of P2P Earnings
Interest you earn from P2P lending is taxed as ordinary income, just like interest from a savings account or bond. The platform will issue tax documents reflecting the interest you received during the year, and you report it on your federal return.
When a borrower defaults and the loan is charged off (written off as uncollectible), the lost principal may be deductible as a short-term capital loss. You can use capital losses to offset capital gains, and if your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income, carrying any remaining losses forward to future years. Tracking individual loan outcomes across dozens or hundreds of notes can be tedious, so look for year-end tax summaries from your platform.
Liquidity Is Limited
P2P notes are not like stocks you can sell instantly. Most loans have terms of three to five years, and your money is tied up until borrowers repay. Some platforms have offered secondary markets where you could sell notes to other investors before the loan matured, but these marketplaces have been inconsistent. Several have been shut down or restricted by regulators concerned about how liquidity features were being marketed.
As a practical matter, treat money you put into P2P lending as locked up for the duration of the loan term. If you need access to your funds within a year or two, this is not the right investment. The lack of liquidity is one of the biggest differences between P2P notes and other fixed-income investments like bonds or bond funds, which can typically be sold on established markets.
Steps to Get Started
- Check your eligibility. Verify that your state allows P2P investing and that you meet the financial suitability requirements for the platform you’re considering.
- Open an account. Sign up on the platform’s investor side (separate from the borrower side). You’ll provide personal and financial information, similar to opening a brokerage account.
- Fund your account. Transfer money from your bank account. Start with an amount you’re comfortable having illiquid for several years.
- Select loans or use auto-invest. You can manually pick individual loan listings based on risk grade, loan purpose, borrower credit profile, and interest rate. Most platforms also offer an automated investing tool that allocates your money across loans matching criteria you set.
- Reinvest or withdraw payments. As borrowers make monthly payments, cash accumulates in your account. You can reinvest it into new loans to compound your returns, or withdraw it to your bank.
How Much to Allocate
P2P lending sits firmly in the “alternative investment” category. It’s illiquid, carries meaningful default risk, and depends on a single platform’s continued operation. Most investors treat it as a small slice of their overall portfolio, typically 5% to 10% at most. The returns can be attractive compared to savings accounts or CDs, but you’re taking on credit risk that those products don’t carry.
If the platform itself were to shut down or face regulatory action, your existing notes would still be contractual obligations of the borrowers, but servicing and collections could become complicated. Keeping your allocation modest protects you against both borrower defaults and platform risk.