Peer to peer lending is normally done through a lending site. It is used by investors who are willing to take a risk and earn better rates than they would with their money in a bank or building society account. Borrowers use peer to peer lenders when they have had difficulty obtaining loans from traditional lenders.
There are a variety of lending websites. Some let you choose the person or business to lend money to and others take your money and use it for different projects, spreading your money between borrowers. The people who borrow from these sites have their credit checked and money is only lent to people with good credit scores.
Some companies have compensation schemes in place in case of default, but others don’t. However, they do take whatever action is necessary to recover their money. Look for a company that is a member of the Peer2Peer Finance Association. It is a self-regulated body designed to ensure high standards and customer protection. Peer to peer lending is regulated by the Financial Standards Authority.
Here’s some information on the three most popular UK sites, all of which are members of the Peer2Peer Finance Association. As well as lending you’ll also be able to see how they carry out their peer to peer borrowing too.
Zopa was the first peer to peer lending website in the UK. If you decide to become a lender your money is divided into sums of £10 and they then spread your money around between various borrowers. This is less risky than lending your money to one borrower only. Bear in mind though that they no longer offer compensation for defaulters. There are two investment methods:
Zopa uses your money across their normal risk market. You pay a 1% fee when you lend and they say investors can expect a return of 3.9% after their fees.
You’ll get a better return with Zopa Plus, it’s 6.1%, but you’ll be lending to higher risk markets with a 1% lending fee after their fees. You can withdraw your funds early, but you will have to pay 1% of the total amount withdrawn.
Unlike Zopa, Ratesetter has a compensation fund so that in the event of a default you may get all or some of your money back. Ratesetter doesn’t offer as high returns as some companies, but they’ll still make more than if your money was locked away in a savings account.
You can’t choose your borrowers, the site does this for you. There’s a minimum lend of £10 and the lending term can be rolling, one or five years.
Withdrawing funds early means that you will have your rate reduced. Ratesetter says that their average rates are 3.1% for rolling credit, 3.7% for one year and 5.9% for five years. This takes into account Ratesetter’s fees.
Funding Circle doesn’t have a compensation fund, so the risk of lending with them is higher than with a company like Ratesetter. However, their returns are better and they claim that nobody who has lent to 100 companies with a maximum exposure of 1% has ever lost money.
You can choose who you want to lend to. Or if you have an investment of £2,000 you can use their Auto Bid feature and spread your money over 100 businesses, lending £20 to each business.
Their minimum lend is £20 to one company and their lending terms are between six months and 5 years. If you want to withdraw funds early you need to find an investor willing to buy your loan part and pay a 0.25% fee.
Funding Circle says the average return for lenders is 6.5% after fees on A+ loans.
There are other sites available for investment, you can also check out the following sites:
You will have to pay tax on peer to peer lending as it is regarded as income. HRMC will want to know how much interest you earned at the end of each tax year. However, if your earnings fall below the basic rate of £1,000 for basic rate taxpayers and £500 for higher-rates then you won’t pay any tax, as it falls under your Personal Savings Allowance.
You can also purchase an Innovative Finance ISA, which has been designed for peer to peer investors and this means that your return is tax-free. The ISA is only available for certain projects which include green energy, business and property development. For the full list have a look at the article from Which?