What exactly is peer to peer lending? How do peer to peer loans and savings actually work?
What is peer to peer lending?
Peer to peer lending is a new form of lending and saving in the UK, that matches people who want to borrow money with those that have money to lend.
By cutting out the middle man, lenders can potentially earn higher rates of interest from the borrowers they lend to, compared with the rate they would get from high street banks.
Peer to peer (P2P) lending in the UK has taken off in recent years, with P2P lending now a permanent fixture on the financial circuit. But how has COVID-19 affected p2p loans, how safe is a peer to peer investment, and is it suitable for you?
Read our guide to learn more about peer to peer lending companies and if the savings and loans can work for you.
Is peer to peer lending safe?
Peer to peer lender isn't the same as a savings account, and it's very important to understand the difference.
If you put your money in a savings account with a bank or building society you could earn a rate of interest in return, although currently savings rates are very low.
With a regulated bank or building society, your money is protected by the Financial Services Compensation Scheme (FSCS) up to the value of £85,000 per account. This means that if the bank were to go bust, your cash would be protected. This is not the case with peer to peer lending.
Peer to peer lending pays a much higher rate of interest. This is because the websites that offer it match the lenders and borrowers at higher rates of interest than the banks, while taking a commission for setting up the deal.
The other issue to bear in mind is that COVID-19 has created a very uncertain economic climate. It's not clear how the jobs market, lending and the economy will be affected and so it's not possible to predict what will happen to peer to peer lending if a deep recession were to hit.
For this reason, it's important to understand that peer to peer lending is much more risky than a simple savings account. Therefore you should only consider this for money you can afford to lose. Even then, you may take the view that the future is so uncertain that this type of lending carries too high a risk in the short term.
What are the peer to peer lending sites?
The biggest peer to peer lending sites in the UK are Zopa, Ratesetter and Funding Circle. There are also some smaller and less well known companies. Some lenders have cut their rates recently because of economic uncertainty.
Why would anyone use peer to peer lending?
By lending your money on a P2P lending site you could enjoy access to higher rates, but there is also the risk that you might lose all your money. It's a balance between risk and reward. Savings rates on traditional bank accounts are very low at the moment, which has led investors to look elsewhere for a better return on their cash.
Compare a number of peer to peer and other personal loans on our comparison table.
Compare peer to peer loans
Compare a number of peer to peer and other personal loans on our comparison table.
How does peer to peer lending in the UK work?
Peer to peer lending is a new form of lending money suitable for both those with money to lend (p2p lending), and those looking for peer to peer loans (p2p borrowing).
Peer to peer lending simply removes any financial institution from the equation, so you could lend money to your neighbour, charge a rate of interest and a time scale, and wait for that money to be repaid.
Peer to peer lending sites like Zopa and Funding Circle merely act as the administrators, helping you find people to peer to peer borrow from, or those who you can offer peer to peer loans to.
By cutting out the banks those looking to lend are able to get slightly lower rates whilst those looking to save money by lending should get a slightly improved rate.
Peer to peer lending sites are therefore growing in popularity for both savers and those looking to lend, but it's important to remember that they're not savings accounts.
Is my money protected in a peer to peer lending site?
There is a big difference between having your cash in a savings account and lending via a P2P platform.
What are the advantages of P2P business loans?
- Those borrowing money are credit-checked and receive a risk rating that informs at what rate they can borrow, similar to a bank
- If you run into trouble recovering a loan the websites act on your behalf
- You can potentially earn much higher than average interest rates
What are the risks of P2P business loans?
- You may not get the headline rate of interest advertised
- You may not get your money back if the borrower does not pay or the lending website goes bust
- Although P2P firms are now regulated, your money isn't covered by the FSCS, and so you could lose all your money potentially
How safe are Peer to Peer lending sites?
In order to lend on a P2P site safely, check that the site you use is regulated by the Financial Conduct Authority (FCA) in the UK. P2P sites in the UK act as a marketplace allowing you to compare different peer's loan rates.
The biggest peer to peer lending sites in the UK are Zopa, Ratesetter and Funding Circle, but there are lots of smaller ones like ThinCats, LendInvest and MarketInvest.
However, due to the way they lend to their members you need to be prepared to put away your money for a long time. What's more, the peer-to-peer lending sites need to make money so they can operate, so each also charges a fee.
How do the P2P lending companies work?
Zopa is perhaps the most established peer-to-peer lender in the UK and has tens of thousands of active members.
Zopa will spread the money you invest among those it lends to (other members) to spread the risk.
To ensure lenders get their full loan amount Zopa uses a fund (called SafeGuard), which covers any shortfall from bad debts in your portfolio. As a result of COVID-19, Zopa says it's monitoring external factors to see if this impacts on customers’ ability to repay their loans.
The company says, it has “significantly tightened our lending criteria” and will make changes to its lending approach as and when needed.
One of the temporary changes it has made to its lending strategy is to tighten its lending policy and reduce lending volumes. It has paused approving loans to higher risk customers and changed the pricing on its other loans.
Funding Circle has halted its lending to retail customers and now currently only offers business loans as a result of the COVID-19 crisis. Funding Circle is now an accredited lender of the British Business Bank’s Coronavirus Business Interruption Scheme (CBILS).
Ratesetter has its own provisional fund to cover any shortfall as a result of bad debts. However, as a result of COVID-19, a greater proportion of money is going into the Provision Fund.
Ratesetter issued the following statement in May 2020: Following the COVID-19 outbreak and the current economic environment. RateSetter announced on 4 May a temporary reduction in interest for the remainder of the year. During this time, investors will receive only 50% of their interest with the other 50% going to the Provision Fund, for the protection of all investors. Also, since the outbreak, the time it's taking investors to release their investments is currently longer than normal.
Peer to peer or savings?
If you're looking to save money then p2p lending may well be a sensible option, but there's a few things you need to be aware of.
First of all, how long are you prepared to have your money locked away for? Peer-to-peer lending only really works if you're happy to have your cash unavailable for one, three or five years.
If you're looking for instant access then an instant-access savings account, some Individual Savings Accounts (ISAs), or even some current accounts may be a better option. While some peer-to-peer sites will let you take out money quickly you will lose a lot of interest.
Read more about ISAs here: https://www.uswitch.com/savings-isa/safe-savings/
Although the big peer-to-peer sites are now regulated by the Financial Conduct Authority (FCA), and have a separate emergency fund they use to cover bad debts and shortfalls in repayments, your money is not guaranteed.
If one of the sites were inundated with bad debts, and its scheme couldn't cover you, then you could lose cash.
For this reason, the FCA has introduced new restrictions (see below) to try to protect consumers.
If you're looking to borrow money, you should carefully read the debt repayment rules depending on what site you're on, and what lender you borrow from. It may be that a bank overdraft or personal loan would be more suitable for you.
You can read our guide on Personal Loans here: https://www.uswitch.com/loans/personal-loans/
Is my money safe with a peer to peer lender?
In order to protect consumers, the FCA has placed a limit on investments in P2P agreements for retail customers new to the sector of 10 per cent of investable assets. This is designed to ensure that they don't over-expose themselves to risk.
In addition, new rules introduced last year tightened up the rules around risk management and advertised rates, require investors understand the risks involved when investing, and strengthen rules on winding down if P2P platforms go bust.
Even with these new rules, P2P investing remains a much higher risk option than a savings account, and should not be regarded as a comparable product.
Read more about social lending and P2P platforms: https://www.uswitch.com/investments/social-lending-with-zopa/
Compare peer-to-peer loans
Compare a number of peer-to-peer and other personal loans on our comparison table.