Peer-to-Peer Lending

Get £100 cashback on 3%-ish

peer to peer lending

Peer-to-peer (P2P) lending firms such as Zopa, Funding Circle and Ratesetter offer rates of up to about 6%, but these are NOT the same as savings accounts. The regulator is worried people jump in without understanding the risks. This guide explains the risks and how the main players stack up.

Warning: The Financial Conduct Authority (FCA) is worried many savers don't understand the risks of P2P lending. It has told the industry to clean up poor practices or face a "strong and rapid" crackdown - see our news story for full details. The FCA is also introducing new rules from December to better protect investors, including limiting how much newbies can invest. Firms will also have to check your knowledge and experience of P2P.

What is peer-to-peer lending?

Peer-to-peer lending websites are financial matchmakers, online money cupids linking people who have money to lend and are looking for a good return, with individuals or companies wanting to borrow. 

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

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 an investment.

Lending isn't done willy-nilly – borrowers are cherry-picked by 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 it's important to consider before putting your money in.

If P2P appeals and you're debt-free and willing to take the risk, the best way to start is 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.

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

    The interest you earn from peer-to peer lending is covered by this – despite the fact they're 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. For more info, see our Personal Savings Allowance guide.

  • The 'innovative finance ISA' (IFISA) allows peer-to-peer 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. These launched on 6 April 2016, but it has taken a while for the major players to get approval to offer them.

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

Peer-to-peer lending is regulated by the FCA

From 1 April 2014, the industry became regulated by the Financial Conduct Authority (FCA) and in June 2019 the regulator published new rules, which all P2P firms have to follow by 9 December 2019, aimed at better protecting investors. The rules include:

  • A limit on how much new investors can put into peer-to-peer lending. You'll only be able to invest a maximum of 10% of your investible assets (so excluding things like your main residence if you own it) unless you've received regulated financial advice. However, you'll need to 'self-certify' by telling the provider you won't invest more than this and it remains to be seen how it'll be enforced.
  • Checks to ensure you have the knowledge and experience to invest. Firms will need to ask you questions to check you know what you're doing, if you haven't received financial advice.
  • More info on plans if a lender goes bust. Firms will have to give you more information about their plans for when things go wrong.

P2P firms must also present information clearly and be honest about risks. All peer-to-peer firms must meet these rules or face sanctions, which can include large fines.

Firms are also required to have at least £50,000 of capital (more for bigger firms) in reserve to act as a buffer to ensure they can withstand financial shocks or difficulties.

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

There are a few things you need to consider before giving a peer-to-peer company your money...

  • Brexit uncertainty could hit peer-to-peer lending

    No one knows exactly what Brexit means for our economy – some say good, others say bad. We do know there is huge uncertainty. P2P is a new industry, most firms have never ridden through a substantial downturn, and we don't know how they will. We list the risks below – the last is the 'unknown unknowns', which the current uncertainty only exacerbates. While we're not saying "don't do" peer-to-peer, we do think you need to consider even more carefully if it's right for you.

  • There's no savings safety guarantee

    With normal UK savings, the Financial Services Compensation Scheme promises it would pay the first £85,000 of any money saved per person, per financial institution if the institution went kaput. Any money you've invested with a peer-to-peer lender that's being loaned out doesn't have this, even now lenders are regulated.
  • There's a risk you won't get your money back

    While for many P2P has worked well, the primary risk is, of course, not being repaid if people or companies you've lent the money to don't pay it back.

    Each peer-to-peer site has its own way to mitigate this risk – make sure you know what provisions a site has in place before choosing it.

  • It may be hard to get your money out early

    Many peer-to-peer lenders allow you to withdraw money early if you want, by matching your existing loans with new investors. While this can work well, lenders with Funding Circle have had to wait months recently. There is 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 take over your loans at the less attractive rate?
  • The rate that lender's quote is NOT guaranteed

    The lenders in this guide quote 'expected', 'projected' or 'target' returns for investors, but the actual rate you get could be less, for example, if part of the money you lent isn't repaid (and there's no provision fund that covers it), or if a borrower repays part of your loan early.
  • 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. Depending on the provider, it could take a few days for it to find borrowers. Bear this in mind, especially if you're investing a lot, as it may take longer to all be lent out.
  • If a peer-to-peer site went bust, who'd collect the loans?

    Technically the loans are between you and the recipient, so if the peer-to-peer site went bust, you'd still be owed. All peer-to-peer firms regulated by the FCA 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 collection agency, though if this did happen, things aren't likely to run anywhere near as smoothly.
  • The unknown unknowns

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

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

Martin: Is peer-to-peer worth it?

With all these risks in mind, is it worth putting your money into peer-to-peer, and if you're already invested should you get your money out? Over to Martin...

Without a crystal ball there are no absolutes. Certainly it'd be very risky to do P2P with a substantial proportion of your assets, or if you're in debt. Brexit-related economic uncertainty adds another worry. Many peer-to-peer sites are set up to deliver back roughly what they promise except in exceptional circumstances. But right now, it's hard not to feel that in many areas of life exceptions are becoming the rule.  

So if you see peer-to-peer money as risk-capital which you're prepared to lose in return for higher possible gain, that's fine. If you see it as savings, to grow safely, without risk, then your money is in the wrong place. If it's a bit of both, reduce the amount.

Which firms are the main lenders?

The P2P market's developing fast, with new sites popping up. However, there's currently a clear three 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.

The most important difference between the sites is how they mitigate your risks as a lender.

When quoting a rate, peer-to-peer lenders factor in an expected amount of 'bad debt', ie, someone not being able to pay back what they've borrowed. This means that if the expected number of people don't repay, you would still earn the listed rate.

Do be aware that rates change frequently, so those listed below are simply a snapshot of a moment in time.

Get £100 cashback on £1,000+, and earn 3%-ish

Newbies who open a Ratesetter* account and invest £1,000+ for a year in its easy-access or ISA products can earn £100 cashback, as long as your money is loaned out within eight weeks of opening.

You must leave at least £1,000 of what you put in for at least a year to qualify for the cashback.

Ratesetter has just launched new products quoting rates of between between 3% and 5%. None has a fixed term, but fees vary for getting your money out.   

Its Access product - which has no fee for access - offers 3%. Ratesetter's Plus product offers 4%, but there is a 30-day interest cost for accessing your money; while the Max product offers 5% but there is a 90-day interest cost for cashing in. Ratesetter's ISA offers 5%. 

How is my money protected? With Ratesetter, you're lending money to individuals and companies (rather than just storing it in a bank) and there's a risk that not all of your money will be paid back – or any at all – which could affect the return you get. However, Ratesetter's provision fund is there to protect your investment.

Ratesetter says it has paid out the expected rate in all cases and the provision fund amounts to £39 million. While the firm is regulated by the Financial Conduct Authority and is one of the largest peer-to-peer lenders, there is always the risk that Ratesetter itself could experience difficulties.

When do I get the cashback? Cashback will be credited to your Ratesetter account within 30 working days of qualifying (ie, after keeping in at least £1,000 for a year) and will be immediately reinvested. You can withdraw this straightaway, though it may take up to one working day. You can withdraw your initial investment of £1,000+ after a year.

How quickly can you withdraw money? To date Ratesetter says it has taken one day on average to release investor's cash, but notes that it can take time as you need to wait for new investors to take on your loans. While there's no fee for withdrawing from its Access product, there is a 30-day interest cost for withdrawals from its Plus product, and 90 days interest with its Max product. 

Projected rates: 3% (Access product - no fee to access money); 4% (Plus product - 30-day interest cost for access); 5% (Max product - 90-day interest cost for access); 5% ISA.  
Unlent cash kept in: Barclays
Min/max lend amount: £10/unlimited (£500 for cashback)
Money lent so far: £3.5 billion
Number of lenders: 78,700

Offers high rates of up to 6.5% - but is the riskiest 

Funding Circle* involves lending to businesses. Projected returns are higher, but so is the expected level of bad debt, so it's the riskiest (also be aware that it recently announced a revenue warning). The Government's also used it, with £315 million committed to fund small businesses.

Anyone can now open an IFISA with Funding Circle, which has the same features as its non-ISA products with the benefit of returns being tax-free.

How is my money protected? Funding Circle used to let you choose which businesses you lend to, but now your money is automatically spread across multiple 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 across its 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 more than 0.5% (min £10) of your money will be lent to a single business.

How quickly can you withdraw money? Your money's lent out over periods ranging from six months to 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, there is a secondary market for selling on the debt. But this depends on a buyer being available – investors have reported it's often taking three months or more to sell loans, so there are no guarantees how fast you might get your money back.

Projected rates: 4.3%-4.7% for Conservative and 4.5%-6.5% for Balanced, after fees and bad debts
Unlent cash kept in: Barclays
Min/max lend amount: £1,000/unlimited
Money lent so far: £5.4 billion
Number of lenders: 83,000

  • Funding Circle splits companies into A+ to E risks. This comes after it's checked company directors for fraud through the CIFAS national fraud database, assessed the company's Experian credit report, confirmed it's traded for more than two years and has no county court judgments of £1,000+ against it. Loans of £100,000+ must be backed by assets.

Longest-running site and offers up to 5.2%

The UK's original peer-to-peer firm, Zopa*, was set up in 2005. You choose how much cash you want to put in and how long you want to lock it away for, and you'll get a fixed rate – it'll spread your money across multiple borrowers to mitigate risk (see below).

Anyone can now open an IFISA with Zopa, which has the same features as its non-ISA products with the benefit of returns being tax-free.

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 (so people Zopa expects to default less).
  • 'Plus', which offers a higher projected return of 5.2% a 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.

How is my money protected? Zopa lends your money to individual borrowers, each of whom gets a risk rating, from A* to E – with E being most likely to default. It diversifies your investment, spreading your cash among many different borrowers. The rate offered has already had Zopa's assumed bad debts and its fee deducted, so it's already worked in an expected number of people who may not repay.

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 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. Zopa says it takes two to three days to get the cash.

Expected 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: £4.5 billion
Number of lenders: 76,000

Alternative sites

Funding Circle, Ratesetter and Zopa aren't the only peer-to-peer sites, but they're the biggest. Members of trade association the Peer to Peer Finance Association (P2PFA) 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 is no longer a member of the P2PFA, though it is still FCA-regulated and one of the largest peer-to-peer lenders. There are also new sites springing up that aren't members of the P2PFA, as well as more established platforms such as Assetz Capital* – it has a range of different types of loans you can make.

It's important to be aware that many of these companies 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 peer-to-peer lending sites via the MSE Forum link below.