What is peer to peer savings?
It is a loan based platform which turns your savings into a lending stream for potential borrowers.
This means you can lend your money to others for a fixed return, in the same way a bank or building society offers loans.
This is how it works:
Add your savings to your chosen P2P providers platform
Lend your money to a borrower through the P2P provider
The borrower pays your money back with interest over a set term - making you a profit
You can choose how long to lend your money for, with terms as short as 31 days up to 6 years available.
Be careful how long you tie your money up for, as there are penalties for withdrawing your funds early.
How much can you save?
There is no maximum amount so you can save as much as you like.
However, there is a minimum limit to how much you have to lend; typically around £10 or £25.
As P2P savings works like a loan, there is a risk you may not get your money back if the borrower does not keep up with their repayments, this is known as defaulting.
For this reason you should spread the risk by lending your savings to several borrowers.
Larger investments, such as £50,000, can take longer to distribute to borrowers which means you will need to wait longer to get a return on all of your money.
As with all investments, these accounts are not without an element of risk so consumers shouldn't plunge their life savings in without understanding exactly how their money will be used.
If you're tempted by the headline grabbing rates, you should dip your toe in the water and start with smaller investments to see if it's the right choice for you.Source: Hannah Maundrell, Editor in Chief at money.co.uk“
Who can you lend your money to?
This will depend on the provider you choose. The common types of borrowers include:
An individual: somebody looking to borrow money, who may have been unable to get credit through traditional methods, e.g. through a bank
A start-up business: new enterprises which need funds for expansion or development in their business
Depending on the demand for funds, you may need to wait a few days or weeks until you can lend your money out.
P2P providers will keep your money in a holding bank until you can lend it out, with some offering a small amount of interest during this time.
Can anyone borrow your money?
No, borrowers must pass a series of checks to qualify for P2P lending.
These checks are completed by the P2P provider, and include:
A full credit check
An affordability assessment
An identity check
If the P2P provider you choose is registered with CIFAS they will also perform an anti-fraud background check on every borrower. If the provider is not registered with CIFAS they will not perform this check.
Which borrower should you choose to lend to?
Individuals are categorised based on their credit history which also has an impact on the amount of interest you can get in return for your money, broadly speaking:
|Borrowers credit history||Risk to your money||Your interest rate|
Start-up businesses are not categorised by their credit profiles so you will need to research the company before deciding to lend to them.
Does it cost you anything?
Yes, most providers will charge you an annual servicing fee of around 1% which is taken from each repayment before it gets to you.
If you withdraw your savings during a fixed term you will be charged a sale fee, this is usually around 0.25%. The sale fee covers the costs of finding a new investor to put in the amount you take out of the fixed term loan.
If you withdraw your money at the end of an agreed term you will not be charged.
Do you pay tax on P2P savings?
Yes, however your provider will not deduct any tax from your interest automatically, unlike banks or building societies.
You will need to declare any P2P savings interest you make by completing a self-assessment form at the end of the tax year.
Can you use your ISA allowance with P2P savings?
This means the interest you earn will be tax free, and you will not need to fill out a self-assessment form for any ISA money you have used in P2P savings.
When do you get your interest?
Usually at the end of the lending term you have chosen, but this depends on whether you lent your money on a fixed term or rolling term basis:
Fixed term: You lend your savings for a set time, e.g. one year, and get your capital back at the end. You can also choose to have any interest paid to you on a monthly basis.
Rolling term: You will be paid a portion of your capital, and interest, every month for a set term. This means you can withdraw or re-invest your monthly capital repayments after every month if you choose to.
Where can you invest in peer to peer savings?
It is an online savings platform only, and each provider has its own way of operating.
You should compare all of the P2P savings and investment providers to find the one which will give you the best return on your savings.
To start saving you need to register on your chosen provider's website, add your savings then choose who to lend your money to from a list of borrowers.
Will your peer to peer savings be protected?
There is no protection under the FSCS, meaning you will lose your money if you save through a provider who goes bust.
However, some P2P providers offer their own schemes which will cover your savings should a borrower default on their payments.
These schemes hold a set amount on money to cover any default payments. If a large amount of borrowers default at the same time, the scheme may not have enough money to cover the total loss to each investor, meaning you could lose your money.
Make sure you check the details of any scheme offered by a provider before you invest your money.
Most loan based peer to peer providers do offer schemes, but for investment based peer to peer providers it is not the case.
An investment based P2P provider lets you buy equity in emerging companies. You will get a return on your money if the company's profits grow, but if the company fails you will lose your money.
Is peer to peer savings regulated?
Yes, peer to peer providers have been regulated under the FCA since April 2014, meaning each provider has to comply with the following terms:
Be clear and transparent regarding risk and who will borrow your funds
Your money must be protected by providers meeting certain capital requirements
Providers must have plans in place to collect your money if their platform collapses
You can find out if a peer to peer company is regulated by searching for their name on the FCA register - this does not mean they are covered by the FSCS.