Peer to Peer Loans & Lending

About Peer to Peer Lending

What is peer to peer lending?

Peer to peer (or P2P) lending is the process of matching individuals and businesses to borrowers, often through online platforms. By operating without a bank, and using online platforms, they operate at a much lower running cost than a traditional financial lender, helping to provider a better rate of return for the lender, and a better loan for the customer.

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How does a peer to peer loan work?

An online service matches investors with customers looking to borrow money. The service then takes a fee for providing the connection, usually included within the APR% paid back by the customer taking out the loan. Some providers also charge the investors for assessing the risk of the loan.

Is peer to peer lending safe?

It offers a lot of control to both the buyer and the investor, however the risk isn’t necessarily spread evenly:

1. Is it safe for the investor?

As peer to peer loan companies offer you a lot of control over how you spread your assets, it’s as safe as you make it. There have been reports of people not diversifying across enough companies, and therefore taking a larger hit if one company defaults on their loan. The recommended spread is to invest no more than 2% per individual company.

Some companies such as RateSetter have a parachute fund that aims to payback any losses experienced by their investors.

2. Is it safe for the loan customer?

Peer to peer loans are as safe for the customer as a traditional unsecured bank loan. You will also get a much better interest rate than a traditional bank.

Investing in Peer to Peer Lending

If you’re thinking of investing your savings into a peer to peer lending scheme, then here’s what you should consider.

Best Peer to Peer Lenders for Investors

The best peer to peer lender for investing your money in is RateSetter, because their parachute fund means that if someone defaults on a loan they repay you the amount lost so you’re never in the red.

This contrasts with companies such as Funding Circle who have no such scheme,

Advantages and Disadvantages of Investing in Peer to Peer Lending

There is a big debate about the pros and cons of peer to peer lending investment.

Advantages of investing in peer to peer lending

1. Higher rates of return: with companies offering up to 7.5% return on investment, it’s a much better return than could be expected in traditional savings accounts.
2. Safe if used well: if you diversify your investment across multiple companies, then you should expect a consistent return.
3. Less fees: because the online services work at a lower cost, you pay less fees in the process of investing your money.
4. Now fully regulated: the Financial Conduct Authority now regulates peer to peer websites, with clear rules that they must follow.

Disadvantages of investing in peer to peer lending

1. Risky in the wrong hands: if you don’t invest in multiple sources and spread your risk, you can be vulnerable to companies defaulting on their loans.
2. No safety net: if the peer to peer company goes bust, your money is not safeguarded by the government.

How much money can you make from peer to peer lending?

There is no limit on how much money you can make from peer to peer lending. The interest gained after fees and bad debts averages around the 4% mark between all companies, so an investment of £10,000 could generate the following return:

Year	Year Interest	Total Deposits	Total Interest	Balance
1	£400.00	£10,000.00	£400.00	£10,400.00
2	£416.00	£10,000.00	£816.00	£10,816.00
3	£432.64	£10,000.00	£1,248.64	£11,248.64
4	£449.95	£10,000.00	£1,698.59	£11,698.59
5	£467.94	£10,000.00	£2,166.53	£12,166.53

How is income from peer to peer lending taxed?

Peer to peer lending income is taxed the same as a traditional savings account. The majority of people won’t pay income tax on their lending income, because the Personal Savings allowance is £1,000 tax free for basic rate taxpayers, and £500 for higher rate payers.

After this, any income is taxed using current income tax rate.

You can also offset bad debt losses against the interest gained before tax is calculated.

Get Started with Peer to Peer Lending Investments

To get started, review the application processes of each company below, with RateSetter being our recommended provider:

1. RateSetter (apply now)
2. Funding Circle (apply now)
3. Zopa (apply now)