Get £100 cashback on 3%-ish
Peer-to-peer lending firms such as Zopa, Funding Circle and Ratesetter can let you earn a big 6%+, but even the regulator is worried people jump in without knowing the risks. We run through the risks and what's being done to minimise them, and how the main players stack up.
Warning: Regulator crackdown on peer-to-peer lending
As the Financial Conduct Authority (FCA) is worried many don't understand the risks of P2P lending, it's introducing new rules from December to better protect investors, including limiting the amount of total assets newbies will be able to invest. Providers will also have to check your knowledge and experience of P2P.
Plus, we live in volatile times...
With Brexit uncertainty ongoing, be fully aware of the risks of P2P lending before putting your cash in.
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.
As the banking middleman is cut out, borrowers often get slightly lower rates, while investors offering loans get far improved headline rates, with the sites themselves profiting via a fee.
Before you put any money into peer-to-peer lending, 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 smells like an investment.
Lending isn't willy-nilly, 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. However, there are risks involved that it's important to be aware of before putting your money in.
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 JULY 2019)
|Peer-to-peer websites||3.1% (1)||3.8% (1)|
|(1) Via Ratesetter.|
In the past, basic-rate taxpayers lost £20 in tax for every £100 of interest earned, while higher-rate taxpayers lost £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.
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.
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 peer-to-peer firms will need to follow by 9 December 2019, designed to better protect investors. These 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 (which excludes 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.
- Stronger rules on plans if a lender goes bust. The new rules mean that firms will have to give you more information about their plans for when things go wrong.
In addition, peer-to-peer firms must 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 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.
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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. Peer-to-peer 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 it's 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 choose to by matching your existing loans with new investors. This normally works well, but there is a question of how this would work if interest rates rise.
If you're lending out at 4% and want to exit, but now newcomers can lend out at 9%, there is the question of how easy it will be in practice to get someone to take over your loans at the less attractive rate.
- The rate lender's 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.
- 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.
- 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.
Martin: Is peer-to-peer worth it?
So, with all the risks in mind, is it worth putting your money into peer-to-peer, and should you take it out if you use it already? Over to Martin...
Without a crystal ball there are no absolutes. Certainly it'd be very risky to do this with a substantial proportion of your assets, or if you're in debt. Currently Brexit uncertainty adds another worry. Many peer-to-peer sites are set up to deliver back roughly what they promise except in exceptional circumstances, and right now, it's hard not to feel like in many areas of life exceptions are the rule.
So if you see peer-to-peer money as risk-capital 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, your money is in the wrong place. If it's a bit of both, reduce the amount.
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.
Each of these sites 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 also 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 number of people a firm expects not to repay don't, 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.
Newbies who open a Ratesetter* account and invest £1,000+ for a year in its easy-access or fixed accounts (including ISAs) 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.
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 3.1% if you invested in its easy-access account, called 'Rolling Market', or 3% for its one-year fix.
How is my money protected? With Ratesetter, you're loaning money to individuals and companies rather than just storing it in a bank, so 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 from the point of earning interest in all cases and the provision fund currently amounts to £39 million. While it 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 (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 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.
Expected rates: 3.1% (easy access), 3% (one year), 3.8% (five year) after fees and bad debts
Unlent cash kept in: Barclays
Min/max lend amount: £10/unlimited (£500 for cashback)
Money lent so far: £3.24 billion
Number of lenders: 78,700
Funding Circle* is the purest peer-to-peer system and lends to businesses. The advertised rates are higher, but so is the expected level of bad debt, so it's riskiest (also be aware that it recently announced a revenue warning). The Government's started using 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 any interest you earn being tax-free forever.
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, 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 time it takes to find one ranges from less than 24 hours to two weeks. However, there are no guarantees with how fast you might get your money back.
Expected 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 billion
Number of lenders: 81,000
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.
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 as 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 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. 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 billion
Number of lenders: 76,000
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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 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.