Background

Peer-to-peer (P2P) lending began in the early 2000s as an alternative to bank financing, letting individual investors fund consumer loans through online marketplaces. Well-known U.S. platforms reshaped access to credit, but differences in underwriting, servicing, and legal structure mean borrowers must read contracts closely. For platform-level guidance see our primer on risks, returns, and how P2P works (risks, returns, and how they work).

How P2P loans commonly work

  • A platform lists loan listings or issues promissory notes on behalf of a borrower.
  • Individual investors buy notes or shares of a loan; the platform typically services payments and collections.
  • Loan documentation may be issued by the platform, a sponsoring bank, or a special-purpose vehicle; servicing and ownership can transfer.

In my practice I’ve seen two recurring issues: borrowers not recognizing assignment/transfer language and underestimating fees that are charged up front or on servicing. That can materially change the loan’s effective cost.

Primary risks to watch

  • Default and credit risk: If you miss payments you face late fees, default interest, and accelerated repayment. Default can also trigger reporting to credit bureaus and aggressive collection (CFPB).
  • Platform or servicer risk: Platforms can change servicers, assign loans to third parties, or fail. Assignment can affect how disputes are handled and who enforces the note.
  • Liquidity and investor-pricing risk: Some P2P notes are resellable on secondary markets at a discount—meaning the economic owner can change quickly.
  • Hidden or layered fees: Origination fees, servicing fees, investor fees, or platform marketplace fees can increase your effective APR.
  • Weak consumer protections: P2P notes may lack the same charters or exam regimes as banks and are not FDIC-insured.
  • Data privacy and fraud exposure: Platforms collect sensitive data; review privacy and data-sharing terms.

Key contract items to check (contract checklist)

  • Parties and role definitions: Confirm who is the lender, servicer, and legal note holder. Check whether the platform is a marketplace only or the actual creditor.
  • Total cost and APR: Verify the stated interest rate, origination fees, and calculate an effective APR. Ask for a breakdown of up-front vs ongoing fees.
  • Origination and platform fees: Note amounts, timing (deducted from proceeds vs added to balance), and refund rules if the loan is canceled.
  • Assignment and transfer rights: Look for broad assignment clauses that let the platform or investors transfer the loan without notice or borrower consent.
  • Servicing and contact changes: Confirm who collects payments, how notices are delivered, and whether servicing can transfer mid‑loan.
  • Default, acceleration, and cure periods: Check exact triggers for default, late fee amounts, grace periods, default interest rates, and whether you get a cure window to avoid acceleration.
  • Prepayment and yield protection: Identify any prepayment penalties, yield-maintenance provisions, or investor payment adjustments that raise the cost of paying off early.
  • Collection costs and attorney fees: See whether the contract requires you to pay the lender’s collection costs, and whether this survives bankruptcy or discharge.
  • Security and cosigners: Ensure whether the loan is unsecured or secured, and clearly note cosigner obligations and release mechanics.
  • Governing law, venue, and arbitration: Note choice-of-law clauses, mandatory arbitration, class-action waivers, and forum selection—these change your dispute options.
  • Reporting to credit bureaus: Confirm whether the platform reports payments and defaults to the credit bureaus (affects credit rebuilding or damage).
  • Privacy and data-sharing: Review how your personal and financial data are shared with investors or third parties.

Practical checks before you sign

  1. Request the full promissory note and sample investor-facing documentation; read both.
  2. Ask for an itemized estimate: principal, all fees, payment schedule, and the effective APR.
  3. Confirm who will service the loan and how to contact them if issues arise.
  4. Search for platform complaints via the Consumer Financial Protection Bureau and state regulators (CFPB, state banking departments).
  5. Compare with bank or credit-union offers; sometimes a traditional lender provides stronger consumer protections at a similar rate.

Real-world example

A borrower I advised took a $10,000 P2P loan listed with a 5% origination fee deducted from proceeds and an advertised 10% interest rate. They later learned the effective APR exceeded 14% once the origination fee and a monthly servicing fee were included. The borrower would have saved money by asking for an upfront payoff schedule and comparing APRs.

Professional tips

  • Don’t sign until you get the final promissory note. Marketing quotes often omit fees written into the note.
  • Calculate effective APR yourself or ask for a Truth-in-Lending disclosure equivalent; treat any nontransparent fee as a red flag.
  • If assignment or arbitration clauses are broad, consider negotiating or choosing a different lender—these limit legal remedies.
  • Keep records of all communications, disclosures, and funding documents—these are essential if servicing transfers or disputes arise.
  • When in doubt about complex contract language—like indemnities, set-off clauses, or default interest—consult an attorney.

Where to learn more and related guides

  • For platform-level evaluation, see our guide on how to evaluate peer-to-peer loan platforms (evaluate peer-to-peer loan platforms).
  • For a broader look at P2P structures and pricing, see our overview of risks, returns, and how P2P works (risks, returns, and how they work).
  • For a quick checklist of items borrowers should confirm before applying, read our short guide (what borrowers should check before applying).

Authoritative resources

Professional disclaimer

This information is educational and not individualized legal or financial advice. It reflects U.S. marketplace practices current as of 2025. For contract review or questions about state law, consult a licensed attorney or a qualified financial advisor.

Author note

I have 15+ years advising borrowers on personal loan choices and contract review. In practice, careful contract review and asking three simple questions about fees, assignment, and default cures prevents most surprises.