People use these sites for 1 or 2 things or sometimes both.
1) People looking to consolidate high interest loans and debt, usually credit cards, with a lower interest rate. This also includes people who are looking to borrow money at a lower interest rate than their local lender. These funds can be used for anything you want. ie. home improvement, buying a car or paying bills.
2) People looking for alternative investment vehicles that have higher than average yield. Yields on Bonds and stocks are really low these days with the markets being in a very strong bull cycle.
The two biggest players in P2P lending are LendingClub and Prosper. I have an account with LendingClub so I will talk about my experience with them, but Prosper has a very similar system in place. I've been with LendingClub for almost two years and my average return is 7.45% Pretty darn good in my opinion when a high interest savings account gives .25% interest rate. Loans are are graded from A to G, with A being the safest and therefore, lowest return rate of around 5-6%. Grade G loans can have a return of 24-28%, but these are much riskier and default rates are much higher.
Loans are called notes and can be bought at $25.00 increments in any combination of grades. The idea is maximize return with minimal risk so the max I ever invest in a single loan request is $50.00. With my $10,000 account I have 585 notes spread over a combination of Grade A, B, C and some Grade D notes. Statistically speaking, I have less than 0.1% chance of having a negative return over the life of the account. The key here is to not put all your eggs in one basket so to speak. Spread the risk around and you will get consistent returns. There are many who get double digit returns by buying a combination of the higher, but riskier notes. I'm heavily considering this with another account just to see how well it does. They also have automated investing that will automatically invest any cash balance based on your chosen lending criteria. How easy is that? I will also add that I will be adding $10,000 to a new IRA account with LendingClub instead of my usual self-directed IRA account I have with my brokerage.
This industry is just a small speck in the $3 trillion dollar loan industry but I really believe this is the wave of the future.
Message or comment if you have any questions. I can also send you an invite and you will get $50.00 bonus to start ( I make no $ from this and I am not an affiliate.)