Peer-to-Peer Lending

Can you really get 7% returns?

Peer-to-peer savings firms like Zopa, Funding Circle and Ratesetter can let you earn a big 7% on your cash.

While it can work well if you're able and willing to lock money away, it's important you understand the risks of this hybrid form of 'saving' and investing before parting with your cash.

This is a full guide to the best peer-to-peer lenders, running through how it works, how it's regulated, what the risks are, and how the different players stack up.

What is peer-to-peer lending?

Also known as crowd-lending, these websites are industrial-scale online financial matchmakers; money-cupids matching individual borrowers or companies with savers willing to put money aside for longer, hunting for a good return.

As the banking middle-man is cut out, borrowers often get slightly lower rates, while investors get far improved headline rates, with the sites themselves profiting via a fee.

Peer-to-peer looks like saving, tastes like saving, but as there's no savings safety guarantee, it smells like an investment.

Lending isn't willy-nilly though; borrowers are cherry-picked by credit checks and rated according to risk. These websites do all the repayment chasing on your behalf – so there's no legwork like lending to a fella down the pub.

If it appeals to you, you're debt-free, willing to up the risk and put money away for a longer term, then the best way is to start by dipping your toe in the water. Put a small amount of cash in until you're used to it, remembering that each site works slightly differently.

SAVINGS INTEREST VS PEER-TO-PEER PREDICTED RETURNS
(RATES AT OCTOBER 2018)
TABLE_CELL_STYLE EASY ACCESS 5-YEAR FIX
Normal Savings 1.5% 2.7%
Peer-to-peer websites 4% (1) 6.3% (2)
(1) via Ratesetter (2) via Ratesetter

You're covered by the Personal Savings Allowance

In the past for every £100 interest earned, basic-rate taxpayers lost £20 in tax, higher rate £40. Yet now the personal savings allowance (PSA) means every basic-rate taxpayer can earn £1,000 interest without paying tax on it (higher rate £500).

The interest you earn is from peer-to peer lending is covered by this - despite the fact it's not 'savings' in the traditional sense - although it's worth remembering you do have just one personal savings allowance per tax year. Any interest you earn that exceeds the allowance will be subject to tax.

Some providers let you put your money in an ISA

The 'innovative finance ISA' (IFISA) allows peer-to-peer investors to lend out up to the annual £20,000 allowance within an ISA wrapper, so interest on that portion of money will be tax-free forever. These launched on 6 April 2016 but it took a while for the major players to get approval to offer them.

All of the providers below now offers IFISAs to both new and existing customers. For more information on this type of ISA, see peer-to-peer 'savings' to be included in ISAs.

You MUST know the risks – peer-to-peer lending isn't for everyone

While for many, it's worked well, returns (and indeed your capital) aren't guaranteed. The primary risk is, of course, not being repaid.

Each peer-to-peer site has its own way to mitigate this risk, most work well, so that's a crucial factor to consider when choosing a site.

Yet that isn't the only thing to consider...

Peer-to-peer is now regulated

Consumers using peer-to-peer sites are now better protected after the industry became regulated by the Financial Conduct Authority from 1 April 2014.

The rules state that peer-to-peer firms must present information clearly, be honest about risks and have plans ready in case things go wrong. All peer-to-peer firms must meet these rules or face sanctions, which can include large fines.

Firms have to have at least £50,000 worth of capital (or more for bigger firms) in reserves to act as a buffer to ensure they can withstand financial shocks or difficulty.

Your cash may not be lent straight away

No interest is paid while your cash is waiting to be lent out. A few thousand pounds should be lent quickly. But if you're lucky enough to have big cash, say, £50,000 to put in, it can take a number of weeks, so drip-feed it in. There are ways to speed up lending, but it usually involves getting a lower rate.

There's no savings safety guarantee

With normal UK savings, the Financial Services Compensation Scheme promises it'd pay the first £85,000 per person, per financial institution if the institution goes kaput. Peer-to-peer lenders don't have this, even now they're regulated.

If a peer-to-peer site goes bust, who'd collect the loans?

Technically the loans are between you and the recipient, so if the peer-to-peer site goes bust, you'll still be owed. All trade body members are required to have insurance to pay for a third party collection agency, though if it did happen, things aren't likely to run anywhere near as smoothly.

The unknown unknowns

There have been no big horror stories or glaring problems so far in the UK. Yet there have been a few in other countries and as this is a new, innovative industry, factor in the unknown unknowns, which could potentially blight your cash in an unpredictable way.

If you've tried peer-to-peer lending, please let us know if it worked out well for you, and anything extra you think needs adding to the guide .

Best buys: Which peer-to-peer lender should I use?

The market's developing fast, with lots of new sites popping up. However, there's currently a clear top three that make up the majority of the market.

We've listed them below in order of ease of use, not necessarily returns. The most important difference between the sites is how they mitigate your risks as a lender.

Each site works slightly differently. As with a lot of things in life, the greater the risk, the higher the return.

Longest-running site, though it no longer has a Safeguard fund

The longest-running site, with decent rates and risk spreading

The UK's peer-to-peer grandpa, Zopa* was set up in 2005. In 2013 it shifted how it works, so it feels just like putting your money in normal fixed-rate savings - though remember that peer to peer lending is more like investing. You choose how much cash and how long you want to lock it away for, and you'll get a fixed rate.

Last year it changed its product offering again, and removed its Safeguard fund - but it still spreads your money across multiple borrowers to mitigate risk (see below). Anyone can now open an IFISA with Zopa, which has the same features of its non-ISA products with the benefit of any interest you earn being tax-free forever.

Currently Zopa offers two products:

  • Core, which has a projected annual return of 4.5% after fees and bad debts, with a 1% fee to withdraw funds early. This lends to borrowers with a risk rating of A* to C, the lower end of the risk spectrum.
  • Plus, which offers a higher projected return of 5.2% per year, with the same 1% fee to withdraw funds early. It lends to borrowers across all of Zopa's risk ratings of A* to E, making it a riskier product than Core.

Risk mitigation. Until June 2017, Zopa had a Safeguard fund in place on some of its products. This was a provision fund which allowed for any bad debts, meaning if someone didn't repay their loan you'd still receive your money, but it's now been withdrawn completely for new loans.

Zopa lends your money to individual borrowers, each of whom gets a risk rating, from A* to E. It diversifies your investment, spreading your cash in £10 bites among many different borrowers. The rate offered has already had both Zopa's assumed bad debts and its fee deducted, so it's already worked in an expected number of people not repaying.

If a borrower misses four months' worth of repayments, Zopa will try to collect the loan through a recovery process, though it'll initially deduct the amount unpaid from your account. If it recovers the money, it'll add it back to your account.

How quickly can you withdraw money? You get monthly repayments, which can either be paid back into your holding account, or lent out again. If you want to access a lump sum that's still being lent, you can sell on your outstanding loans for a 1% fee. It takes three to five days to get the cash.

For over three years, MoneySavingExpert.com founder Martin Lewis has been using all three big peer-to-peer lenders. Here's his experience of Zopa – though of course there are no guarantees...

  • I've been with Zopa the longest, including before it introduced the Safeguard system. Returns before then were just over 5%, and in the relatively short time since have been 4.6% – which is what was promised.

  • Current rates: 4.5% for Core and 5.2% for Plus after fees and bad debts
  • Unlent cash kept in: RBS
  • Min/max lend amount: £1,000/unlimited
  • Money lent so far: £3.22bn
  • Number of lenders: 76,000

Made to look and feel like normal savings for beginners

Feels most like 'normal' savings.

Ratesetter* is the Rory Bremner of crowd-lending – it's always done a good impression of normal savings accounts. You choose your account and put cash in - though remember, peer-to-peer lending isn't 'saving' in the traditional sense, and smells more like investing.

Now Zopa's moved closer to its system, it's easier to compare the two on rates. Ratesetter also allows you to instantly reinvest the interest, so you can benefit from compounding.

One advantage Ratesetter has over Zopa is it's more customisable over rate. For example, if it suggests a market rate of 5% to you – if you wanted your money to be lent out quicker you could go for 4.8%, or if you were willing to wait you could see if it'd be matched at 5.2%.

Anyone can now open an IFISA with Ratesetter, which has the same features of its non-ISA products with the benefit of any interest you earn being tax-free forever.

Risk mitigation. With Ratesetter's Provision Fund, you get a set rate at the time you put money in. You should receive this, unless there are major problems. So far, it's paid out as promised and the Provision Fund has £24.1 million in it.

It's worth noting that Ratesetter's no longer a member of trade body the Peer to Peer Finance Association, whose members sign up to pledge certain standards of conduct and protection, though it is still regulated by the FCA and one of the largest peer to peer lenders.

How quickly can you withdraw money? You can withdraw your money at any time, but may need to wait a few days for new investors to be found to take on your loans.

There's no fee to withdraw from an easy access account (called Rolling Market), but early withdrawals from the 1 year market have a 0.3% fee, and the 5 year market has a 1.5% fee.

For over three years MoneySavingExpert.com founder Martin Lewis has been using all three big peer-to-peer lenders. Here's his experience of Ratesetter – though of course there are no guarantees...

  • My average has been a high 5.1%, as I put more money away for five years at 6% than the 4.9% for three years and 3.8% for one. However, the rates have dropped in recent times, so you won't get these now.

  • Current rates: 4% (easy access), 5.3% (1yr), 6.3% (5yr) after fees and bad debts
  • Unlent cash kept in: Barclays
  • Min/max lend amount: £10/unlimited
  • Money lent so far: £2.81bn
  • Number of lenders: 68,900

You lend to companies - generally pays top rates

Highest rates – but biggest risk of bad debt

Funding Circle* is the purest peer-to-peer system and lends to businesses. The advertised rates are higher, but so are the bad debt provisions, so it's riskiest. The Government's started using it, with £80m put there to fund small businesses.

Anyone can now open an IFISA with Funding Circle, which has the same features of its non-ISA products with the benefit of any interest you earn being tax-free forever.

Risk mitigation. Funding Circle has recently overhauled its lending system. All investors now need to use the Autobid system, and you can no longer choose which businesses you lend to. Here's how it works:

Spread the risk: Its Autobid system simply spreads your money over a wide range of borrowers. So if one fails to repay, it won't hit you too badly. You can choose from two products; Balanced, which lends your money to businesses with a full range of risk ratings and; Conservative, which has a lower expected return but lends to the two lowest-risk classes of business.

For both products, no individual loan part will be larger than £100, and no more than 0.5% (min £20) of your money will be lent to a single business.

How quickly can you withdraw money? Your money's lent out over periods between six months and five years. As the loans are repaid, you receive a proportion back every month plus interest which you can choose to withdraw or reinvest.

If you want to access your money early, you can trade the debt with other investors on the secondary market. This used to have a 0.25% fee, which was removed in August 2017. Access depends on having a buyer for your debt - Funding Circle says the average time to sell is just under eight hours. There are no guarantees however with how fast you might get your money back.

Quick question

  • Funding Circle splits companies into A+ to E risks. This comes after it's checked company directors for fraud through the CIFAS database, assessed the company's Experian credit report, confirmed it's traded for more than two years and has no county court judgments of £200+ against it. Loans of £100,000+ must be backed by assets.

For over three years, MoneySavingExpert.com founder Martin Lewis has been using all three big peer-to-peer lenders. Here's his experience of Funding Circle – though of course, there are no guarantees...

  • Since I started drip-feeding cash in, my return after all bad debt and fees has been 6.2%. I didn't pick individual borrowers, just used its Autobid. I opted for a riskier spread – my gamble has paid off, but it doesn't mean it always will.

  • Quoted expected return: 5%-5.5% for Conservative and 6%-7% for Balanced, after fees and bad debts (1% annually)
  • Unlent cash kept in: Barclays
  • Money lent so far: £3.1bn
  • Min/max lend amount: £1,000/unlimited
  • Number of lenders: 77,000
  • Funding Circle splits companies into A+ to E risks. This comes after it's checked company directors for fraud through the CIFAS database, assessed the company's Experian credit report, confirmed it's traded for more than two years and has no county court judgments of £200+ against it. Loans of £100,000+ must be backed by assets.

Alternative sites

All the risks involved in peer-to-peer lending mean it's sensible to spread your money around different providers, so you're less exposed to any unpredictable shocks.

Funding Circle, Ratesetter and Zopa aren't the only peer-to-peer sites, though they're the biggest. Members of the trade association the Peer to Peer Finance Association include ThinCatsMarketInvoiceLending Works*Landbay* and Folk2Folk, along with Funding Circle and Zopa. These all have to obey its rules on protection.

It's worth noting that Ratesetter's no longer a member of the P2PFA, though it is still regulated by the FCA and one of the largest peer to peer lenders. There are new sites springing up all the time which aren't members of the P2PFA, as well as more established platforms like Assetz Capital* – it has a range of different types of loans you can make.

We would love your feedback on your experiences of using peer-to-peer lending sites.

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