Peer-to-Peer Lending

Get £50 cashback on 3%-ish

peer to peer lending

Peer-to-peer lending firms such as Zopa, Funding Circle and Ratesetter can let you earn a big 6%+, but you need to be aware of the risks before parting with your cash, especially with Brexit uncertainty.

In this guide, we run through how this hybrid form of 'saving' and investing works, how it's regulated, what the risks are, and how the different players stack up.

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. 

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 offering loans 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.

Normal savings 1.55% 2.6%
Peer-to-peer websites 2.6% (1) 5.7% (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 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 you 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 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. 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.
  • 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.

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. 

Get £50 cashback on £500+, and earn 3%-ish

Newbies who open a Ratesetter* account and invest £500+ for a year in its easy-access or fixed accounts (including ISAs) can earn £50 cashback, as long as you put money on loan within eight weeks of opening. 

You must leave at least £500 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 2.6%-ish if you invested in its easy-access account, called 'Rolling Market', or 4%-ish 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 £500 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 £500+ 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. 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...

  • 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.

Expected rates: 2.6% (easy access), 4% (one yr), 5.7% (five yr) after fees and bad debts
Unlent cash kept in: Barclays
Min/max lend amount: £10/unlimited (£500 for cashback)
Money lent so far: £3.05bn
Number of lenders: 75,800

Generally pays top rates with up to 6.5%, but is riskiest 

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. 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. 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...

  • 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.

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: £4.6bn
Number of lenders: 79,000

  • 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 pays up to 5.2%

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.

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...

  • 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.

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: £4bn
Number of lenders: 76,000

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 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'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.