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peer to peer lending

Peer-to-Peer Lending

Get rates of up to 6.5%

Helen Saxon
Updated 3 June 2021

Peer-to-peer lending firms such as Zopa and Funding Circle offer rates to investors of up to 6%, but while their products can look and act like savings, they're NOT the same.  This guide explains the risks and looks at how the main players stack up.

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What is peer-to-peer lending?

Peer-to-peer (P2P) lending websites are financial matchmakers, online money cupids, marrying up people who've cash to lend and are looking for a good return, with individuals or companies wanting to borrow.

With the banking middleman cut out, investors putting up cash for lending can get much higher rates than they would from a savings account, while borrowers often pay less than with a conventional loan. The sites themselves profit by taking a fee.

With P2P lending, different companies offer different investment opportunities, but there are a few main categories of lending you can choose from:

  • Lending to individuals. This is where P2P lending started, and it's fairly simple. Borrowers take out personal loans, and you (and thousands of other lenders) fund those loans. The borrower then pays back the loan over the agreed time period.

  • Lending to companies. This can either be a straightforward loan to the business, or it can be 'invoice finance' where the company borrows (from you) against future cash it has coming in from invoices. When the company's customers pay the invoices, the company has the cash to pay you back.

  • Lending for property. This is the third type of P2P lending. Here you're usually lending to developers so they can build a property. Once the development's finished, and the property is sold or rented out, the developer will then have the cash to repay your loan. 

But before you get excited by the rates on offer and put any money into P2P, it's important you understand that it's NOT like traditional savings.

Peer-to-peer may look like saving, but as there's no savings safety guarantee and you could lose your money, it's really investing.

Lending isn't done willy-nilly – borrowers are cherry-picked using credit checks and rated according to risk. The websites do all the repayment chasing on your behalf – so there's no legwork like lending to a bloke down the pub. However, there are risks involved which are important to consider before putting your money in.

Here's Martin's view of how you should look at P2P lending...

'Don't put money in if you can't afford to lose it'

Peer-to-peer (P2P) lending looks like savings (but with higher interest, eg, 5%), acts like savings, but smells like investing. As we've warned, it ISN'T covered by the UK savings safety net, which protects bank, building society and credit union savings up to £85k per person, per institution if they went bust.

Even in this new industry, we've already seen two small UK P2P platforms, Lendy and Funding Secure, recently collapse.

The Financial Conduct Authority is so concerned about people's attitudes to P2P, and that some marketing makes it seem like savings, it's ruled that firms won't be allowed to let those who haven't had independent financial advice put more than 10% of their investable assets (ie, excluding their home) into P2P.

While the rule is only for new investors, if you already had money in there, it's a good spur to check your exposure to P2P. Those saving regularly may have more in it than they think. Even then, 10% is still high for many. As with all investments, the best stance is NEVER HAVE MORE MONEY IN THAN YOU CAN AFFORD TO LOSE.

This isn't a coded message to say don't do P2P. I'm not anti-it; I do it myself. Yet I meet more and more people who see it as akin to savings. It isn't. It's investing. Investing can be great – you do it to get higher returns than savings, but the cost is the risk of losing money.

It's important to understand the risk, and decide if you accept it, not just when putting money in, but then continually reviewing whether you want the exposure. That's especially important in uncertain times, such as right now. For those comfortable with the risk, P2P can be a great option (and has been for me).

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Peer-to-peer lending need-to-knows – including crucial RISK warnings

Please read all the need-to-knows here so you know what you're getting in to. If you don't have time, at least read the headlines so you're aware of the risks of this type of investing...

  • 1. There's no savings safety guarantee, so you could lose EVERYTHING you put in

    With normal UK savings, the Financial Services Compensation Scheme offers you a level of protection. It promises to pay the first £85,000 of any money saved per person, per financial institution if that institution went kaput. Any money you've invested with a P2P lender that's being loaned out doesn't have this, even now lenders are regulated.

    And while for many people P2P lending has worked out well, with a good rate of return, we don't know what the future holds.

    And while P2P firms have to give you clear and honest information about the risks of the lending that they do, and their plans for when things go wrong (and also need to have at least £50,000 of capital for if things go wrong), we must caution you – and we'll say it in big letters:

    Before investing in any peer-to-peer investment, be prepared for the possibility that any – and indeed all – investments your money is put in could fail, leaving you with NOTHING.

    Only EVER put in cash you can afford to lose.

  • 2. If you're new to peer-to-peer lending, you won't be able to invest more than 10% of your 'investable assets'

    Regulator the Financial Conduct Authority launched a set of tighter rules for P2P lenders in 2019. The headline one was that new investors are no longer allowed to put more than 10% of their 'investable assets' into P2P (an investable asset is essentially spare cash, so doesn't include things like your home or car – though a second home would be counted towards your total investible asset worth).

    You'll need to 'self-certify' by telling the provider you won't invest more than this.

    However, this 10% limit won't apply to all. For example, if you've received financial advice, you'll be able to invest more. Plus if you're an experienced investor (the platform will ask you a series of questions each year to check this) you also won't be bound by the limit.

    Our view is that while this 10% rule is only for new investors, it's an important signal about not overexposing yourself to the risks – see Martin's warning above.

  • 3. Some peer-to-peer providers let you invest through them in an innovative finance ISA

    The 'innovative finance ISA' (IFISA) allows P2P investors to lend out up to the annual £20,000 ISA allowance within an ISA wrapper, so interest on that portion of money will be tax-free forever. The two providers we mention as top picks in this guide both offer IFISAs to new and existing customers.

    However, if you prefer to use your ISA allowance for a cash ISA or a stocks & shares ISA, you can just lend through these sites outside of the ISA wrapper. You'll pay tax on the interest, unless it's covered by your personal savings allowance.

  • 4. It may be hard to get your money out, as you usually need to 'sell' the loan to another investor

    Accessing your cash usually depends on there being new investors you can sell your loans to. While this can work well in good times, we saw 1,000s of people trying to access their cash at the start of the pandemic – but there were very few new investors to buy the loans. This led to queues lasting months.

    So be aware that while you can access your cash, it may not be instant – and it could even take months.

    There's also a question of how this secondary market would work if interest rates were to rise. If, say, you're lending out at 4% and want to exit, but newcomers can lend out at 9%, how easy will it be in practice to get someone to actually take over your loans?

  • 5. The interest rate lender's quote is NOT guaranteed – you could end up with a lower rate (or even no interest)

    The P2P platforms in this guide quote 'expected', 'projected' or 'target' returns for investors.

    But, in practice, the actual rate you get could be less. For example, we saw larger numbers of borrowers than usual defaulting on loans during the pandemic, which hit investors' returns.

  • 6. Your cash may not be lent straightaway, so could earn no interest for a while

    No interest is paid while your cash is waiting to be lent out.

    Usually this doesn't matter, as it only takes a few days for your cash to be lent out. But, since the start of the pandemic, we've seen it take up to a couple of months for cash to be lent out.

    There's often little you can do to speed this up, so you'll need to be prepared to accept that your money won't be working for you for the first couple of weeks or months.

    This is especially pertinent if you're lending a lot in one go. It's best to dripfeed money into the platform £10s or £100s at a time.

  • 7. Check what'd happen if your peer-to-peer firm went bust – who'd collect the loans?

    Technically the loans are between you and the borrower, so if the P2P site went bust, you'd still be owed. All P2P firms need to have plans in place for an 'orderly wind-down' of the business. This could include having insurance to pay for a third party to collect outstanding loans, though if this did happen, things aren't likely to run anywhere near as smoothly.

    An example of this was investors in collapsed firm Lendy waiting to see if they'll get back their share of the £150 million invested.

  • 8. No one can know all the risks – there are always unknown unknowns. Again, be prepared for the possibility you could lose ALL your cash

    There have been horror stories in the US and with some providers in the UK, including the May 2019 collapse of mid-sized firm Lendy. This is a fast-changing industry and you have to factor in the unknown unknowns.

    While some firms came through the pandemic, others didn't. And even the ones that came through saw their business change overnight – more borrowers defaulted and more lenders wanted to get their money back as they needed to use their savings. Loan rates went up, but so did bad debt provisions, so the 'target' interest rates for investors actually went down.

    Other things will happen in the future that we can't predict, so you need to consider if you're willing to take this risk with your money.

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Peer-to-peer top picks

Currently there are two firms that make up the majority of the market.

Each works slightly differently, and – as with a lot of things in life – the greater the risk, the higher the return. Do be aware rates change frequently, so those listed below are simply a snapshot of a moment in time.

WARNING: The peer-to-peer lending sector suffered during the pandemic, and many sites have not yet recovered. Our top picks are either not accepting new customers, or have a waitlist to do so.

illustration

Top pick peer-to-peer firms – our review

Our two top picks focus on lending to businesses or individuals.

Funding Circle lends to small businesses, and has the highest projected returns of our two top picks. However, the expected level of 'bad debt' (the amount of loans made that the P2P firm doesn't expect to be paid back) is also high, so it's the riskiest of our picks. However, it's not currently accepting new investors (or letting existing ones add new funds or reinvest repayments) due to the pandemic – though it does hope to offer it again in future, which is why we've left it in our top picks.

Our other top pick is the UK's original P2P firm Zopa, which was set up in 2005. You choose how much cash you want to put in (min £1,000) and whether you want to invest in its Core or Plus product (or split your cash between both) and it does the rest, spreading your money across multiple borrowers to try to lower the risk. Target returns are slightly higher with the Plus product, as it lends to slightly riskier borrowers.

Zopa has introduced a temporary waiting list for new investors – you can leave your email address and it'll notify you when it can accept you as a new investor.

How the peer-to-peer platforms compare 

TABLE_CELL_STYLE Funding Circle Zopa     
Projected returns (1)           4.3% - 4.7% (Conservative)
4.5% - 6.5% (Balanced)		 2% - 4% (Core)
2.1% - 5.3% (Plus)
Min/max investment £1,000/no max £1,000/no max
Unlent cash kept in Barclays RBS
Money lent so far £5.8 billion £5 billion
Number of lenders 83,000 76,000

(1) After fees and bad debts.

Alternative P2P sites

Funding Circle and Zopa aren't the only P2P sites, but they're the biggest. Other sites include the likes of MarketFinance, Lending Works*, Assetz Capital, CrowdProperty and Folk2Folk. Some of these are new and/or small, so you need to think carefully if you are comfortable with the level of risk associated before you decide to use any of them.

We would love to hear your feedback on your experiences of using these P2P lending sites in the MSE Forum discussion.

Peer-to-peer investing FAQ

  • Is interest from peer-to-peer investing covered by the personal savings allowance?

    Yes, the interest you earn from P2P lending is covered by the personal savings allowance – despite the fact they're not 'savings' in the traditional sense. So basic-rate taxpayers can earn up to £1,000 in interest (in total, from P2P lending and savings combined) per tax year and higher-rate taxpayers can earn up to £500. Additional-rate taxpayers don't get a personal savings allowance.

    Any interest you earn that exceeds the allowance will be subject to tax. For more info, see our Personal Savings Allowance guide.

  • How is peer-to-peer lending regulated?

    Following the introduction of enhanced Financial Conduct Authority (FCA) rules in the sector, previous self-regulatory body the Peer-to-Peer Finance Association has been disbanded. A new group, 36H (named to reflect that members are fully authorised by the FCA under article 36H of the Financial Services and Markets Act 2000), has been set up in its place to be a voice for the industry.

    Membership is open to all lending platforms that are authorised and regulated by the FCA under article 36H legislation. So far, the only members are Funding Circle, Zopa, Lending Works and CrowdProperty. The group says it will "focus on policy and regulatory matters, as well as promoting the benefits the sector is delivering; including bringing choice, competition and transparency to the lending and investment markets".

    We will update this guide with any changes in the sector as a result of this work and as and when any other platforms join.

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