In this guide, we’re going to look at peer-to-peer loans from the perspective of the “investor” or “saver” (lender).
The past few years have seen interest rates at historically low levels, which has meant low returns on savings accounts. As a result, some savers looking for a better return on their money have been tempted to lend their money via P2P websites.
P2P websites allow people with spare cash to lend it directly to those wanting to borrow money. The P2P site does all heavy lifting: screening applicants, doing credit checks, handing out the loans, collecting the repayments and paying money back to the “savers”. It will even do the chasing up of borrowers who fall behind with their repayments. And you might be relieved to know that as a lender you don’t need to deal directly with the borrowers – and no personal details are shared!
How it works
So what’s involved? If you decide to lend via P2P site such as Zopa or Ratesetter (there are a number of other sites too) then you would pay your money to them – and they arrange to lend it out for you. Typically if you lend your money for a shorter term you’ll get a lower return than if you lend for longer. Some sites allow you to select the “risk profile” of the people you want to lend to. Lower risk borrowers pay a lower interest rate so you’ll get a lower return. Decide to lend to borrowers with a less good credit profile and you’ll get a slightly higher return.
The interest rate you could typically receive on your money is 5% - 7.5% (depending on which site you use). To find out how Zopa would work for you, use the Zopa interest calculator.
To reduce the risk the money you invest is split up amongst lots of borrowers – typically no more than 2% is lent to any one individual. Some borrowers may “default” on their loans (not repay them in full), but because your money is split amongst lots of borrowers your exposure to these is reduced.
There also P2P sites that specialise in lending to small businesses – Funding Circle is one example.
Lending via a P2P platform is not like putting your money in a savings account. With peer-to-peer lending, the money you invest is at risk so you need to decide whether you feel comfortable with this. Both of the firms mentioned above are regulated by the Financial Conduct Authority, however, your money is not covered by the Financial Services Compensation Scheme.
Some P2P platforms have their own compensation fund to cover you if individual borrowers do default on their payments. This isn’t the same as the FSCS as doesn’t mean that your funds are guaranteed in the event of a larger scale problem. You can find out more about Ratesetter’s scheme the Provision fund, and Zopa’s Safeguard Fund.
Whether you choose to lend via a peer-to-peer lender is a decision that only you alone can make. You’ll need to weigh up the promised return on your money with the additional risk you accept compared with a more traditional savings account.
Disclaimer: All information and links are correct at the time of publishing.