Peer-To-Peer Lending and Borrowing: All You Need To Know (2024)

Table of Contents

  • How does P2P work for investors?
  • How much can investors earn?
  • What are the risks?
  • Should I invest through P2P?
  • Do P2P investors pay tax?
  • How does P2P work for borrowers?
  • What are the pros and cons of borrowing through P2P?
  • Can I complain about my P2P lending company?

Show moreShow less

Heard of peer-to-peer but not quite sure how it works? This guide whether using it – either to make money or to pay less to borrow – could be the right option for you.

Peer-to-peer (P2P) lending firms match people or businesses looking to lend money (investors/savers) with those wanting to borrow. The companies aim to make a profit by charging a fee for facilitating the transaction.

P2P lending websites claim that cutting out banks or building societies means investors can often earn a more competitive return on their money, while borrowers typically pay less in interest than they would with a conventional loan.

How does P2P work for investors?

With savings rates having been stuck in the doldrums for years, savers and investors have been looking for alternative ways to earn interest on their cash. This has led to a rapid rise in the number of P2P websites on the market and the number of people using them.

Should you choose to become a P2P investor, you’ll need to create an account with a P2P website and then transfer the amount you want to invest. The three main P2P firms include RateSetter, Zopa and Funding Circle, but there’s a whole host of smaller firms to choose from too.

You’ll need to decide:

  • how much you want to invest – the minimum is often around £1,000, but some companies allow you to invest smaller amounts
  • what rate of interest you’d like to receive – higher interest rates usually come with higher risk of losing some or all of your money
  • how long you’re happy to lend your money for – eg, two, three or five years.

In most cases, the amount you invest will be split between a range of different borrowers. This can help reduce the risk of you losing a lot of money if one borrower defaults or is unable to keep up with their repayments.

How much can investors earn?

You can expect to earn anywhere between 2% and 6% with peer-to-peer, but this will depend on how long you are happy to lock away your funds for, and who you are lending to. You’ll earn a higher rate of interest if you invest for longer and if you take on more risk.

Interest rates on conventional savings accounts are typically around 1% at the moment, with a few paying up to 1.5%.

P2P loan returns are based on the creditworthiness of the borrower, so if you’re happy to lend to individuals or businesses with lower credit ratings – where the risk of the borrowers defaulting is higher – the interest rate received will be more competitive.

On the other hand, if you’d prefer to take on less risk and only lend to those who are less likely to default, the rate of interest will be lower.

Note that the rate of interest you see on a P2P website is not guaranteed – instead, it is a ‘projected’ or ‘target’ return, which means you could actually earn less.

What are the risks?

If you’re considering using a P2P platform it’s important to understand that you will be investing your money (rather than putting on secure deposit), so there is a risk you will lose some or all of the amount you invest.

In other words, P2P should not be viewed in the same way as a traditional savings account.

You should also be aware of the following:

There is no savings safety net

If you have a UK savings account, your money will be protected by the Financial Services Compensation Scheme (FSCS), which covers amounts up to £85,000 of savings per individual, per financial institution.

However, the FSCS does not cover any money invested with a P2P lending platform, so if a borrower defaults on their loan, you won’t be protected.

That said, a number of P2P websites have their own protection schemes in place – often known as provision funds – which may pay out if a borrower misses a payment.

Schemes vary between P2P firms so it’s important to check the terms and conditions carefully.

Your P2P lending site could go bust

If your P2P firm goes out of business – and many already have – it’s possible you will lose the sum of money invested.

UK P2P companies must be regulated by the Financial Conduct Authority (FCA) which means lenders’ money needs be ring-fenced. But while this may provide some peace of mind, it’s not always as straightforward as it sounds.

When P2P firm Lendy collapsed in 2019, investors were left out of pocket to the tune of more than £150 million after it was revealed that funds were not ring-fenced as they should have been, and as investors had believed.

You may not be able to get your money out early

If you agree to lock your money away for a fixed term, you may find that some P2P schemes won’t allow you to withdraw funds early, while others will charge a fee for doing so.

Often your existing loans will be matched with other investors to allow early withdrawal to happen, but be aware that this can take days or even weeks.

This implies that you should keep sufficient funds in an instant access account to take care of surprise expenses or expenditure, and only invest money in P2P that you can afford to wait to realise.

Should I invest through P2P?

Providing you are happy with investing and understand the risks involved, you may be able to earn a much higher return with P2P than you would through the majority of savings accounts – but you should never invest more than you can afford to lose.

Since 2014, peer-to-peer lending has been regulated by the FCA, which has provided greater protection for investors.

In December 2019, new FCA regulations came into force that mean new investors who have not received independent financial advice must be assessed to check they fully understand how P2P works.

New investors will also be unable to put more than 10% of their investable assets in P2P platforms until they become more experienced.

Do P2P investors pay tax?

Any money earned through P2P lending is usually classed as income, so tax will be due. However, thanks to the personal savings allowance, basic rate taxpayers can earn up to £1,000 of tax-free interest a year, while higher rate taxpayers can earn up to £500 a year.

Should you hold P2P loans in an innovative finance ISA, you won’t be taxed on any interest you earn, providing you don’t go over your overall ISA savings/investment limit of £20,000 per tax year.

Keep in mind that your annual ISA allowance applies to the aggregate of innovative finance ISAs, cash ISAs, stocks and shares ISAs and lifetime ISAs you may hold.

How does P2P work for borrowers?

As well as investing through P2P to potentially make money, you can also use it to borrow.

The main attraction of borrowing in this way is it is often possible to secure lower interest rates compared to conventional loans.

However, the amount you pay will still depend on factors such as your credit rating. If your credit history is patchy, you’ll pay a higher rate of interest than someone who has an excellent credit score, for example.

Both individuals and businesses can apply for a loan through P2P. Should you choose to do so, you’ll need to register on your chosen P2P lending website and select how much you want to borrow and over what term.

It may be worth entering different values for the amount and the term to see if this makes a difference to the interest rates you are offered.

For example, rates on relatively low borrowings of, say, £2,000, may be higher than they are for £7,500. But you should never use a lower rate as encouragement to borrow more than you need or can afford to pay back.

It’s also worth remembering that borrowing over a longer term may reduce the size of the monthly repayments, but as you’ll be making those repayments for longer, this may lead to you paying back more overall.

As P2P lending firms tend to divide loans between different investors, you may find you’re offered a certain loan amount at one interest rate and another loan amount at a different rate.

What are the pros and cons of borrowing through P2P?

Pros

  • It can be cheaper than borrowing through a conventional loan
  • It can be a good option if you’re struggling to get a loan from a bank or building society, although credit checks will still be carried out
  • There are often no early repayment fees if you want to pay back your loan earlier than planned
  • Loans are unsecured so there is no need to use an asset such as your home as collateral.

Cons

  • You will need a good credit score to secure the best rates
  • You may have to pay a fee for arranging the loan
  • You may not be able to afford your monthly repayments.

Can I complain about my P2P lending company?

Because P2P lending is now regulated by the FCA, if you are not happy with the service you receive and you make a complaint, the company has eight weeks in which to resolve the issue.

If you are still not happy after this time, you can take your complaint to the Financial Ombudsman Service.

Compare Loans From Leading Providers

Find loans you're most likely to be approved for, without affecting your credit score

Compare Loans

Peer-To-Peer Lending and Borrowing: All You Need To Know (2024)

FAQs

What do you need to know about peer-to-peer lending? ›

What P2P borrowing is. P2P websites match people looking to borrow money with those looking to lend it. The companies that provide these services (called 'platforms') act as intermediaries between borrowers and lenders. P2P lenders can offer lower interest rates than traditional lenders such as banks.

How effective is peer-to-peer lending? ›

P2P lending offers an alternative to traditional bank lending and can be beneficial for borrowers who may have trouble qualifying for a loan through a traditional lender. It can also offer borrowers with good credit scores a lower interest rate.

What are the red flags for P2P? ›

Inconsistent Stories: If the reason for the transaction keeps changing or doesn't seem to add up, take that as a warning sign. Unusual Payment Requests: If someone asks for payment in the form of gift cards or through multiple small transactions, it's a significant red flag.

How do you succeed with peer-to-peer lending? ›

Tips for Being Successful in the Peer-to-Peer Lending Industry
  1. Research before you invest. Study the loan history of the lending company you're thinking about working with. ...
  2. Start slow. ...
  3. Know your risk tolerance. ...
  4. Diversify your loans. ...
  5. Reinvest your returns. ...
  6. Use automation to reinvest. ...
  7. Keep a strong emergency fund.
Jan 28, 2021

What is the minimum credit score for peer-to-peer lending? ›

In general, P2P lenders tend to look for credit scores of around at least 600. However, each lender has its own requirements. Collateral: If you have less-than-perfect credit, some personal loan lenders offer secured loans. You use property, such as a car, as collateral for the loan.

Does peer-to-peer lending show up on credit report? ›

You can read more about hard vs soft credit checks here. Soft credit searches don't directly impact your credit score. However, once you have been accepted, activity on your P2P loan will be reported on your credit report.

What is the highest return on P2P? ›

High Returns: With P2P lending, investor can lend capital to borrowers and earn fixed returns on a mutually negotiated interest rate - as high as 36% and for a duration ranging from 12 months to 36 months and create a seamless passive income with regular monthly repayments.

How much money do I need to start peer-to-peer lending? ›

The amount of money you need to participate in P2P lending varies depending on your chosen platform. Some platforms allow you to start with a relatively small investment, while others may have minimum investment requirements. Generally, you can begin investing in P2P loans with as little as $25 to $1,000 or more.

What is the maximum amount for a peer-to-peer loan? ›

RBI guidelines allow any individual, HUF (Hindu Undivided Family), firm, society, or company to participate in a P2P lending platform. As per new guidelines, the RBI raised the investment limit for individuals by five times to Rs 50 lakhs.

What is the average return on a P2P loan? ›

Lenders for P2P loans may be enticed by the high returns they can make compared to other investing options. Typical returns for P2P investors per year average at about 5 percent to 9 percent while some investors see 10 percent or more returns.

What happens if you don't pay back a peer-to-peer loan? ›

What happens if you don't pay back a peer-to-peer loan? If you don't repay a P2P loan, you'll typically see a significant negative impact on your credit score. You're also taking money from individual lenders, causing them to incur a financial loss.

What are the pitfalls of peer-to-peer lending? ›

Nevertheless, peer-to-peer lending comes with a few disadvantages:
  • Credit risk: Peer-to-peer loans are exposed to high credit risks. ...
  • No insurance/government protection: The government does not provide insurance or any form of protection to the lenders in case of the borrower's default.

How to make money in peer-to-peer lending? ›

Monthly Income – Investors are paid every month when borrowers make payments on their loans. This means a solid portfolio of P2P loans can generate a steady stream of passive income. Higher Yields – Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields.

How long does peer-to-peer lending take? ›

With most loans facilitated online, peer-to-peer lending can be faster and more convenient than going through a more traditional institution. Borrowers can often get funding within a few days, and investors can start earning returns almost immediately.

Is peer-to-peer lending a good way to make money? ›

Monthly Income – Investors are paid every month when borrowers make payments on their loans. This means a solid portfolio of P2P loans can generate a steady stream of passive income. Higher Yields – Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields.

Do you have to pay back peer-to-peer lending? ›

If you receive a loan, you might first need to pay an arrangement fee to the P2P platform. Then you pay back the loan, with interest, by making regular repayments for the duration of the loan agreement.

How does peer-to-peer banking work? ›

Peer-to-peer payments (P2P) are digital transactions between two individuals. This type of mobile banking allows funds to be transferred directly from one person's bank account, checking account, credit or debit card, or payment app to another person's bank account or app.

What is the limit for peer-to-peer lending? ›

RBI guidelines allow any individual, HUF (Hindu Undivided Family), firm, society, or company to participate in a P2P lending platform. As per new guidelines, the RBI raised the investment limit for individuals by five times to Rs 50 lakhs.

Top Articles
Latest Posts
Article information

Author: Terence Hammes MD

Last Updated:

Views: 6080

Rating: 4.9 / 5 (69 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Terence Hammes MD

Birthday: 1992-04-11

Address: Suite 408 9446 Mercy Mews, West Roxie, CT 04904

Phone: +50312511349175

Job: Product Consulting Liaison

Hobby: Jogging, Motor sports, Nordic skating, Jigsaw puzzles, Bird watching, Nordic skating, Sculpting

Introduction: My name is Terence Hammes MD, I am a inexpensive, energetic, jolly, faithful, cheerful, proud, rich person who loves writing and wants to share my knowledge and understanding with you.