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Peer-to-Peer Lending

Get £110 cashback on 3%-ish

Martin Lewis
Martin Lewis and Amy Roberts
Updated 11 December 2018

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

While this can work well if you're willing and able to lock money away, it's important you understand the risks of this hybrid form of 'saving' and investing before parting with your cash – as there's a risk you'll lose your money. We run through how it works, how it's regulated, what the risks are, and how the different players stack up.

Peer-to-peer best buys:

In this guide

See also: For traditional savings accounts, read our Top Cash ISAs and Top Savings guides.

What is peer-to-peer lending?

Peer-to-peer lending websites are industrial-scale online financial matchmakers; money-cupids matching individual borrowers or companies with lenders willing to put money aside for longer, hunting for a good return. It's also known as crowd-lending.

As the banking middleman 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 and you could lose your money, 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, 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.

SAVINGS INTEREST VS EXAMPLE PEER-TO-PEER PREDICTED RETURNS
(RATES AT DECEMBER 2018)
TABLE_CELL_STYLE EASY ACCESS 5-YEAR FIX
Normal savings 1.5% 2.7%
Peer-to-peer websites 3.3% (1) 5.5% (1)
(1) 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 in interest without paying tax on it (higher-rate £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.

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 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 took 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.

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...

  • There's a risk you won't get your money back

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

    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.

  • The rate lenders quote isn't guaranteed  

    The lenders in this guide quote expected interest rates, 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 to cover it), or if a borrower repays part of your loan early.

  • Peer-to-peer is now regulated

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

    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 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 this can take longer to all be lent out.
  • 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. Peer-to-peer lenders don't have this, even now they're regulated.
  • 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 sites that are members of the trade body the Peer to Peer Finance Association are required to have 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 smaller providers in the UK. This is a relatively new and changing industry and you have to factor in the unknown unknowns. Things will happen in this industry 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.

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.

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

Do be aware that their rates change frequently, so the ones we've listed below are simply a snapshot at a moment in time. Listed rates also take into consideration the possibility of 'bad debts' – meaning you can still earn the listed rate should some of your money not be paid back.

Each of these sites works slightly differently, and as with a lot of things in life, the greater the risk, the higher the return.

Ratesetter*

3,000 left. Get £110 cashback on £1,000+, and earn 3%-ish

Apply*

Newbies who go via our link to open a Ratesetter* account and invest £1,000+ for a year in its easy-access or fixed accounts (including ISAs) can earn £110 cashback, as long as you fund it within eight weeks of opening. You need to register by Mon 31 Dec and there were around 3,000 left as of Tues 11 Dec, but there's a chance more could become available.

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

Alternatively, if you do an ISA transfer of at least £5,000 from another provider and invest for a year, you'll get £150 cashback - but only do this if you were planning on it anyway.

It'll quote a rate when you click through but they change throughout the day depending on supply and demand, and you can also choose to set your own rate. At the time of writing, Ratesetter was quoting rates of 3%-ish if you invest in its easy-access account, called 'Rolling Market', or 4%-ish for its one-year fix.

How is my money protected? As you are loaning money to others rather than just storing it in a bank, there is a risk that not all of your money will be paid back – or any at all – which could affect the rate you get. However, Ratesetter's provision fund is there to protect your investment.

Ratesetter says it has paid out the expected rate from the point of earning interest in all cases and the provision fund currently has £38.7 million in it. While it is regulated by the FCA 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 (after keeping in at least £1,000 for a year) and will be immediately invested into its Rolling Market easy-access account. You can withdraw this straightaway but 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? You can withdraw from its easy-access and fixed accounts, though it may take time (typically one working day) to get your cash as you may need to wait for new investors to be found to take on your loans. There's no fee to withdraw from the Rolling Market easy-access account, but withdraw early from the one-year fix and you'll face a 0.3% fee, or 1.5% with the five-year fix.

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...

  • Find out how Martin fared using Ratesetter

    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: 3% (easy access), 4% (1yr), 5.5% (5yr) after fees and bad debts
Unlent cash kept in: Barclays
Min/max lend amount: £10/unlimited (£1,000 for cashback)
Money lent so far: £2.92bn
Number of lenders: 71,800

Apply*

Funding Circle*

Generally pays top rates with up to 7%, but is riskiest 

Apply*

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.

How is my money protected? 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 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 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 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, you can trade the debt with other investors on the secondary market. 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.

For over three years, MSE 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...

  • Find out how Martin fared using Funding Circle

    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
Min/max lend amount: £1,000/unlimited
Money lent so far: £4.2bn
Number of lenders: 77,000

  • What checks are done on borrowers?

    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.

Apply*

Zopa*

Longest-running site and pays up to 5%

Apply*

The UK's peer-to-peer grandpa, 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 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 (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 in £10 bites 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 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 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, MSE 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...

  • Find out how Martin fared using Zopa

    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: £3.81bn
Number of lenders: 76,000

Apply*

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, but they're the biggest. Members of the trade association the Peer to Peer Finance Association (P2PFA) include ThinCats, MarketInvoice, Lending 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 FCA-regulated and one of the largest peer-to-peer lenders. There are new sites springing up all the time 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.

We would love to hear your feedback on your experiences of using peer-to-peer lending sites via the MSE Forum link below.

Join the MSE Forum Discussion

Peer-to-peer lending

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