Peer to peer lending is on the rise – read our guide to learn more about it and companies like Zopa
Lending out your savings to your peers might not seem like an obvious way of investing, but social lending is becoming increasingly popular.
Peer-to-peer platforms such as Zopa have been offering rates on loans for individuals and businesses at competitive rates, while offering savers a boost on their investment that many banks are struggling to compete with.
Read on to find out how Zopa and other social lending sites work and why they could be a good investment for your money, and also the potential pitfalls.
How does Zopa work?
Zopa and other social lending sites are based on a community of people who lend and borrow money between themselves, rather than going to banks and building societies to get a savings account or a loan.
Social lending can be a win-win solution for lenders and borrowers, who may both be able to find better rates than they might get elsewhere. However, they also come with their own set of problems through added risk.
Is it safe to invest in social lending?
Like all investments, social lending does have an element of risk. Investing in Zopa is not like putting your money into a savings account – there is no 100% guarantee that you will get your original investment back. As always, the opportunity for a higher return on your money goes hand in hand with greater risk.
Also, any money you invest in Zopa will not have the savings protection the FSCS provides for money held in savings accounts with banks and building societies.
This means that if someone you borrowed money to defaults on their payment, you're not fully protected.
Increasingly, peer-to-peer platforms are creating their own 'safety net' funds to ensure that customers get their money back in such an event, so be sure to check what measures the site you use has against lending risks.
Many sites ensure that potential borrowers are credit checked and risk-assessed before you can lend to them.
The money you lend is spread across a number of borrowers to minimise the risk of bad debt, so for example if you were to lend over £1000, your money could be spread across 100 different borrowers.
Zopa also has protection in place for your money in the unlikely event that it were to go out of business – Zopa is not involved in the contracts you have with borrowers, so they remain legally binding and repayments still have to be made.
How can I invest my money with Zopa?
You invest at least the minimum deposit and decide between high or low risk lending.
You can also decide who you want to lend to - you pick the type of borrower you are happy with, based on their level of risk as assessed by Zopa. Zopa then matches offers of lending to requests from borrowers and oversees the loan agreement and repayments for you.
You will have to pay a fee for the service as well, so it's worth adding up your total costs and weighing up the risk when comparing a peer-to-peer platform to a regular savings bank account