Peer to peer lending is also known as P2P or crowdfunding. It matches savers wanting a high return with borrowers needing a low interest rate. Peer to peer is closer to investing than it is to saving.
Peer to peer lending is a way to loan money to borrowers using an online platform.
Because of the nature of peer to peer, as a lender, you could also be referred to as a saver or investor.
You could earn higher returns on the money you add to the P2P platform, than you would if you put the money into savings. But it is riskier than depositing your money into a traditional savings account or ISA.
Borrowers may choose peer to peer because the interest rates on repayments are lower than with banks and other lenders.
Peer to peer lending is only available online. You lend money you want to invest to an individual, a few individuals or a start-up business.
You do not lend the money directly to the borrower, but through an intermediary, or 'platform'.
As with any financial product, it's good practice to shop around for one you like.
Add money to your chosen P2P provider's platform
Choose which borrower or borrowers to lend your money to through the P2P provider
The borrower repays the money with interest over a fixed term
You (hopefully) make a profit
You can usually lend money for as little as 31 days up to 6 years.
There may be penalties for withdrawing early, so be careful about how long you tie up your money for.
Depending on the P2P platform, there may be a minimum investment amount. This could be as low as £10.
There used to be no maximum amount you could invest, but that's changing in December.
From 9th December 2019, lenders operating without financial advice can only loan up to 10% of their investible assets. These assets do not include your main residence.
When you get the interest you've earned on your money depends on if you lend your money on a fixed or rolling term basis:
For fixed term lending, you can either receive your interest monthly or at the end of the term, when you get back your capital
For rolling term lending, you'll get back a portion of your capital plus the interest every month for a set term. This means you can withdraw or re-invest your monthly capital repayments if you want.
Peer to peer borrowers can either be:
Individuals, who may have been unable to borrow money from a traditional lender
Start-up businesses looking for investment to develop their business. This is most commonly known as 'crowdfunding'.
Borrowers must pass a series of checks before they're approved by a peer to peer provider. These include:
A hard credit check
An affordability assessment
An identity check
An anti-fraud background check. This is only if the provider is registered with the fraud prevention service, Cifas
Peer to peer investors choose which borrowers to lend to. Providers categorise individuals based on their credit history.
|Borrower's credit history||Risk to your money||Your interest rate|
This could have an impact on the amount of interest you can get in return for your money.
As with all financial products, there are pros and cons to borrowing through peer to peer lending.
|Competitive borrowing rates||You need a good credit score to get the best rates|
|You can make early repayments||You may have to pay a fee|
|You can overpay||Only available online|
|You can get a quote with a soft credit search||You can only borrow up to £35,000|
Since April 2014, peer to peer providers have been regulated by the Financial Conduct Authority (FCA).
But they're not covered by the Financial Services Compensation Scheme (FSCS), which offers compensation up to £85,000 per financial institution. So, you'd likely lose your money if you save through a provider that goes bust, even though the provider is regulated.
Peer to peer lending can be risky, so platforms need to be sure you know what you're doing when you invest.
They must also:
Use language that is clear and easy to understand
Give lots of information on the risks involved
Include advice on what to do if it goes bust
Have at least a £50,000 buffer should anything go wrong with repayments
Have plans in place to collect your money if their platform collapses
Search the FCA register to make sure your provider is regulated.
As of 9 December, 2019 the FCA tightened the rules on P2P investing, allowing new customers to invest only 10 per cent of their investable assets. These limits ensure that they do not over-expose themselves to risk. This restriction, however, does not apply to new customers who have received regulated financial advice.
The new rules also include:
Making sure that investors of the knowledge and experience. If you haven't received professional financial advice, P2P firms need to ask you a number of questions to check that you know what you're doing.
Supplying more information on plans if they fail. P2P firms need to provide clear details and procedures for wind-down plans if they go bust.
Being clear and honest about risks. All P2P companies must have clear information on the risks of investing in P2P.
Holding at least £50,000 in capital. This capital is intended to ensure that P2P platforms have a buffer to withstand drastic changes in the market.
Before you give money to a peer to peer lending platform it's important to be aware of the risk you're taking.
Although peer to peer lending can be rewarding, the main risk you take is the possibility that you don't get your money back if a borrower or company is unable to repay the loan.
Most P2P platforms have their own processes in place to mitigate that risk, but be sure you're familiar with what measure a platform has in place before you choose one.
As mentioned above P2P lending is not covered by the FSCS, so you could lose your money if your chosen platform goes bust.
Nobody's sure how the economy will react to Brexit. It could be good in in ways, bad in others. Peer to peer lending is a relatively new industry, and it's unclear how the economic impact of COVID-19 and Brexit will affect it in the coming months and years.
Most providers charge an annual servicing fee of around 1%. It's taken from each repayment before it gets to you.
If you withdraw your investment before the agreed term is up, you'll be charged around 0.25% as a 'sale fee'. This should cover the cost of finding a new investor to put in the amount you withdrew.
You will not have to pay a fee if you wait until the end of your fixed term to withdraw the money.
Yes, you do have to pay tax on your P2P interest if it exceeds your personal savings allowance (PSA).
For basic rate taxpayers, your PSA is £1,000, and for higher rate taxpayers, it's £500.
You're not charged tax automatically though. You'll have to declare your peer to peer earnings on a self assessment tax form.
Yes, you can invest in peer to peer using your tax free ISA allowance using an innovative finance ISA.
Your annual ISA allowance is £20,000. Any interest you earn on this amount is tax-free, so you will not need to fill out a self-assessment tax form.
Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.