The lender will put their savings/investment into an account for it to be loaned out to borrowers, and in return will receive a decent interest rate – usually pre-set, and in some cases it can even be chosen by the lender themselves depending on the level of risk they want to take.
Lenders can also often choose the type of borrower they want to lend to – perhaps someone who's been given an excellent credit rating, a good one or a fair one – with different interest rates being available depending on the level of risk (interest rates will often be higher if you lend to a 'riskier' borrower, for example).
They'll then decide on the amount to be loaned out and the repayment terms, and the P2P site will allocate the amount accordingly. Often they'll split the investment up into separate loans to spread the risk between individuals, reducing the possibility of the lender not getting their money back.
The investment will be 'ringfenced' before it's lent out – that is, it'll be kept separate from the Peer-to-Peer company's finances – offering an additional financial safeguard should the company itself go bust. Some even have their own bailout funds to reimburse lenders should borrowers not repay the money, however there is no guarantee that this will cover all, or any losses incurred. Providers must explain how their contingency fund works, and what it covers.
From a lender's perspective, the system is essentially like a traditional savings account – they'll put their money in for a set amount of time, will receive interest on their investment, and will get their capital back once the term has come to an end. They may even be able to access their money at any time, subject to charges.
