It can be very risky, but you can minimize that risk somewhat depending on the notes you invest in. The basic idea is that you are investing in loans that people have applied for. Most require a minimum investment of $25.00 but you can invest more if you want. Though it is probably better, just like investing in anything, to spread things around a larger number of notes, because it is highly likely that at least one note you invest in will default. It's just the nature of the thing.
The upside is that you can get a pretty high return (generally, the notes will range between about 7% for highly rated borrowers to 22% or so for low rated borrowers), provided all of the notes you buy pay on time and mature without defaulting. You can invest in a wide range of note ratings and theoretically average somewhere within the range of highest and lowest rates.
All you have is the information provided to the P2P lender, which usually tells you what their credit score is, income, debt-to-income ratio, total debt, reason for loan, etc. Beyond that though, you don't get to meet or contact any of the borrowers, so you must rely on the information provided.
The higher the interest rate, the more likely it is that the borrower will default; the lower the interest rate, the less likely there will be a deafult...in theory.
So, it is a way to get some fixed income exposure that may provide a higher return than some other fixed income sources; however, it can also come with higher risk as well.
Like with any other investments, make sure you diversify, and don't invest more than you can afford to lose.
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