
Peer-to-Peer Lending
Get rates of up to 6.5%
Peer-to-peer lending firms such as Zopa, Funding Circle and Ratesetter offer rates to investors of up to 6%, but their products are NOT the same as savings accounts. Plus, many who've invested are having trouble getting their money back out during the pandemic. This guide explains the risks and looks at how the main players stack up.
WARNING: The peer-to-peer lending sector has suffered during the coronavirus crisis. Some people who've invested are having trouble accessing their cash, with waits of several months at some providers. Usually you need to sell your loans to others, but the demand simply isn't there to buy them. Rates are also a lot lower than they were before the pandemic, even as APRs borrowers are charged have grown, as providers expect a larger proportion of returns to be lost to bad debt.
See the top peer-to-peer provider boxes to see what's happened at the three big players.

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

What is peer-to-peer lending?
Peer-to-peer 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.
But before you get excited by the rates on offer and put any money into peer-to-peer (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 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.
Regulator the Financial Conduct Authority (FCA) has now launched a set of tighter rules for peer-to-peer lenders. The headline one is that new investors are no longer allowed to put more than 10% of their investable assets into P2P.
As of 9 December 2019, if you've not sought out independent financial advice, you can only invest a maximum of 10% of your investable assets (excluding things such as your main residence). 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.
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You MUST know the risks – peer-to-peer lending isn't for everyone
WARNING: Peer-to-peer lending is currently being tested by the effects of an economic recession, due to the financial impact of the coronavirus pandemic. We have already seen some reaction from providers, but it is too soon to know the full extent of any impact. So before investing in peer-to-peer, be VERY careful.

Here's a list of things you need to consider before giving a peer-to-peer company your money.
If you've tried P2P lending, please let us know if it worked well for you as well as anything extra you think needs to be added to this guide.

Martin: Don't put money into peer-to-peer if you can't afford to lose it
Peer-to-peer 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 from Monday 9 December, 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 have 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).
Main peer-to-peer lending firms
The P2P market's developing fast, and while there are new sites popping up all the time, currently there are 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. Do be aware rates change frequently, so those listed below are simply a snapshot of a moment in time.
Ratesetter quotes rates of between 3% and 4% for its three products. None has a fixed term, but fees vary for getting your money out:
- Access offers 3% – it charges no fee for accessing your cash.
- Plus offers 3.5% – it charges 30 days' interest for accessing your money.
- Max offers 4% – it charges 90 days' interest for cashing in. Ratesetter's innovative finance ISA also offers 4%.
Coronavirus update. Since May the monthly interest rate Ratesetter pays out to investors has been halved (this policy is subject to review every three months). For example, its access account currently offers 3%, but you will now only receive 1.5% – the rest of the interest is being put into its provision fund.
If you want to release your investment, this can now take months from the date you submit the request, as explained in our Ratesetter news story.
Funding Circle involves lending to businesses and has been used by the Government – which has committed £315m. Projected returns are higher, but so is the expected level of 'bad debt', so it's the riskiest. 'Bad debt' refers to a company that might not be able to pay back what it's borrowed.
You can also open an innovative finance ISA with Funding Circle – these have the same features as its non-ISA products, with the benefit of returns being tax-free.
Coronavirus update. Funding Circle has paused new investing for retail investors, but says it hopes to offer this again in the future. This means existing investors aren’t able to add new funds or reinvest their monthly repayments in new loans.
However, they are continuing to receive monthly repayments of capital and interest from the businesses they lend to. Investors are also currently unable to sell loan parts to other investors.
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 try to lower the risk (see below).
You can also open an innovative finance ISA with Zopa – these have the same features as its non-ISA products, with the benefit of returns being tax-free. Currently Zopa offers two products:
- Core has a projected annual return of up to 4% after fees and bad debts (bad debts take into account someone not being able to pay back what they've borrowed). It has 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 offers a higher projected return of up to 5.3% 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.
Coronavirus update. Continues to remain open to existing investors, though it has introduced a temporary waiting list for new investors and is currently only offering new loans invested through Core at A* - B and Plus A*- C – effectively not lending in its higher risk categories.
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Alternative P2P sites
Funding Circle, Ratesetter and Zopa aren't the only peer-to-peer sites, but they're the biggest. Other sites include the likes of ThinCats, MarketFinance, Lending Works*, Landbay, 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.
Following the introduction of enhanced 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, Ratesetter, 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.
We would love to hear your feedback on your experiences of using P2P lending sites via the MSE Forum link below.

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