So instead of putting your money in one investment, you spread it around many. Instead of just investing in shares of Apple, you might also buy stock in Microsoft, Johnson & Johnson and many others.
The idea is that if something happens that drives down the value of one investment or even a whole asset class, through investment diversification you will still be able to reach your long-term financial goals.
Yes, you can actually have too much diversification in your portfolio of loans for two reasons.
Picking between 125 and 200 loans for your entire peer lending portfolio gives you the opportunity to actually look at the loan application.
Spreading your investment across many different loans and risk categories can lower the risk of defaults but it can also lower the return.