What is peer-to-peer lending?
Peer-to-peer lending, also known as P2P, is a way for individuals to lend money to borrowers (their ‘peers’) via a dedicated website.
With no involvement from traditional high-street lenders such as banks or building societies, lenders and borrowers connect with each other instead via an online site (also known as a platform).
Looking to borrow? You may be able to get a loan at a lower rate than you would via a regular personal loan. However, it will depend on your credit history and personal circumstances.
Looking to lend? You may be able to earn higher rates of return than through a savings account, but there are plenty of risks and you could lose your money.
Compare the Market does not offer peer-to-peer lending or act as a P2P platform.
How does peer-to-peer work?
The idea may be simple but there are different stages to the process:
Lenders place their money on P2P platforms – this cash is then lent out to lots of different borrowers, parcelled up into small loans.
Borrowers take out their loans – although an individual applies to take out a single lump sum, their money is actually drawn from many different lenders.
The P2P platform administers the interest repayments – it takes borrower repayments and passes them to lenders.
I’m a lender: how does P2P work for me?
If you think lending on a peer-to-peer website might suit you, here’s how it works:
1. Browse loan listings – compare a range of peer-to-peer platforms and choose a platform that suits you and your goals.
2. Choose an interest rate for your target return – or, if you prefer and the platform allows it, you can set your own.
3. Lend your money to borrowers – once a borrower repays the loan, you’ll earn the money back plus interest. But be aware that this isn't always guaranteed and you will need to pay a fee to the platform (see disadvantages, below).
What are the advantages of lending on a P2P website?
Potential for higher returns – peer-to-peer lending can (though doesn't always) earn you more money than a traditional savings account.
Your investment is spread out – spreading your money across many different borrowers reduces the risk of a default having a big impact on your return.
No tax to pay – if you open an Innovative Finance ISA (IFISA), your P2P loan interest is paid tax-free.
What are the disadvantages of lending on a P2P website?
Borrowers may not be able to repay what they owe – however, some P2P platforms have provision funds or contingency accounts to cover you in the event of defaults.
Late loan repayments – this can affect your returns and when you get your money back.
P2P platform goes bust – a number of P2P platforms have either gone under or stopped offering peer-to-peer lending to focus on traditional banking. P2P platforms aren’t covered by the Financial Services Compensation Scheme (which, for traditional banks, protects up to £85,000 of your savings). However, your borrowers will still owe you money (so should continue to repay). Depending on how the platform is set up, any money you have on account may be protected in a ring-fenced fund, but there's still a risk you won’t get your cash back. Check how each platform looks after your money.
You'll pay a fee – this can start from 1%, usually for administration, but will depend on the platform.
No FSCS protection – P2P lending isn't covered by the Financial Services Compensation Scheme (FSCS). Check what protection the platform offers before you take out a loan.
I’m a borrower: how does P2P lending work for me?
If you’re a borrower, a P2P website could be an alternative to a mainstream lender if you’re considering a small loan or don‘t have a healthy credit score. You could also find you qualify for a better rate than you'd get from a bank or building society.
Some borrowers like the idea of taking out a loan without any involvement from a bank, too.
You can take out a P2P loan for the same reasons as you would a traditional personal loan, e.g. to pay for home improvements or a car.
Here‘s how it works:
Register on a P2P platform and select how much you want to borrow.
Pass a credit check and discover the interest rate you’re eligible to borrow at. Your credit history may influence your offer.
Receive your loan – the money is provided via the P2P website by lots of individual lenders, who come forward to lend small amounts until you’ve got the total you need.
What are the advantages of borrowing from a P2P website?
A good credit score isn’t always necessary – those without great credit scores may find it easier to get a loan.
Only a soft credit check is required – you won’t have to worry about any hard checks affecting your credit score.
Competitive interest rates – if you have a good credit history, it might be possible to get better interest rates than you can on the high street.
Flexible loan amounts and repayment terms – choose from short-term and long-term options.
Fast decision on your application – find out quickly if your loan application is successful.
What are the disadvantages of borrowing from P2P lenders?
Admin fees – the platform may charge you for setting up the loan. If you have loans via more than one platform, you face having to pay multiple fees.
You can only borrow up to £35,000, according to Money.co.uk – if you need more, you‘ll likely need to apply to a mainstream lender.
Applications are usually online only – you‘ll need to be comfortable borrowing on the web without talking to staff or advisers.
You still need a good credit score to get the best interest rates – find out how to check your credit score for free.
How to choose a peer-to-peer platform
When deciding which platform to use, whether you’re a borrower or lender, it’s worth taking into account the following:
Platform fees – check the service charges and how often they must be paid
Interest rates – compare interest rates offered by different platforms
Risk levels – some P2P platforms may have lower credit score entry requirements than others
Standard levels of security – make sure you’re comfortable with how the platform keeps your money secure
Platform reputation – double-check the platform is regulated by the Financial Conduct Authority (FCA)
FAQs
Is peer-to-peer lending safe?
With any kind of loan or investment platform, there are risks for lenders and borrowers. For lenders, there's a risk that the borrower won't repay the money. And for both lenders and borrowers, there’s a risk of the platform going out of business, so make sure to choose an FCA-regulated platform whichever side of the loan you're on.
To check which platforms are FCA-regulated, use the Financial Services Register.
What’s the difference between crowdfunding and peer-to-peer lending?
Crowdfunding typically involves an individual (or small group) raising a target sum via a call for small amounts of money from a large number of people.
This practice, which has been popular on social media, can be used to fund all manner of projects and ventures, from medical expenses to business start-ups and fan projects. Often, the crowdfunders ask only for a donation and contributors get nothing in return.
Peer-to-peer lending, on the other hand, is a type of loan which borrowers repay with interest.
Is there any tax to pay if I'm a lender?
Any money you make through P2P lending is classed as income and taxed. Gov.uk has a detailed explanation of how your interest is taxed and whether you could be eligible for tax relief in certain circumstances.
It's worth knowing that you can use your tax-free allowances to invest in peer-to-peer lending via Innovative Finance ISAs.
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