You are here: Home - Saving & Banking - Understanding -

Peer to peer lending: where should I start and what are the risks?

0
Written by:
23/02/2016
In the latest mailbag letter, a reader asks about the risks and rewards of peer to peer lending.

Dear YourMoney.com. With banks offering such dismal savings rates, I’m thinking of trying peer to peer lending but I don’t know much about it. Where should I start and what are the risks? Janet, Gloucestershire

Peer to peer lending (P2P) is attracting the attention of long-suffering savers tired of the paltry savings rates paid out by high street banks and building societies.

Rates on offer from the main P2P players range from 3% to 6%. Compare this to the average bank savings rate of 0.58% and it’s easy to see why this relatively new industry is growing in popularity.

P2P lending works by matching individual borrowers or companies with savers who are willing to part with their money in the hope of getting higher rates of interest than they’d get from mainstream savings products.

Adding to their appeal, some P2P savings can be held within a new kind of tax-free wrapper called an Innovative Finance ISA, which launches on 6 April 2016. Interest and gains from qualifying P2P loans held in these are eligible for the usual ISA tax advantages.

The borrower/saver ‘matching’ process takes place on a P2P platform. RateSetter, Zopa and Funding Circle are just a few of the big names.

The P2P industry reported a record year in 2015 with the number of lenders up 22% to just over 128,000 and borrowers up 96% to 273,000.

However, the industry has faced its fair share of condemnation.

One of the biggest criticisms is that savers can be encouraged to take on more risk than they should.

Susan Hannums, director of independent savings adviser savingschampion.co.uk, says: “These products are more akin to investments and come with associated risks.”

Andrew Hagger of moneycomms.co.uk says they sit “somewhere between cash savings and stock market investing – not 100% safe like cash but not as volatile as stock markets”.

The other major downside is P2P lenders are not protected by the Financial Services Compensation Scheme so if anything goes wrong and you lose your money, the government won’t help you.

However, this isn’t the deal breaker it may first appear, according to Hagger.

“It’s in the interests of P2P providers to keep lenders’ money safe and secure. If losses incurred are too great and it impacts lenders then word will soon spread and people will lose confidence in the P2P sector as whole,” he says.

Many providers operate their own safety net or provision fund which is used to absorb any late payments or defaults to ensure customers aren’t affected. Each provider has slightly different models so it’s worth doing some research before parting with your money.

The leading peer to peer platforms compared

An important point is that savers should not to get carried away by too-good-to-be-true rates.

“You may find examples of 9% plus rates from some providers but be wary if a higher rate is payable because it’s an indication the loans made by such providers are higher risk and perhaps more complex with more potential for things to go wrong,” says Hagger.

It’s also worth noting that P2P is different to crowdfunding, which lends money to brand new businesses to get them off the ground, and so is riskier than P2P, which lends to established creditworthy borrowers.

Where to start?

Before putting any of your savings money with a P2P company, run through this checklist:

  • How much is the minimum sum you can lend (most are £10 to £100)? It is worth investing a small sum to start with to ensure you’re happy with how it all works.
  • Check the provider website for details of the measures they take to protect your money – most will have some sort of protection in the form of provision fund type safety nets whilst others like Lending Works take it a step further by insuring borrowers against being unable to work due to sickness or unemployment.
  • What is their track record to date regarding defaults/losses? Look for actual figures rather than vague promises – RateSetter is an excellent example as it gives full details of its provision fund including how much is in the fund. There is a really interesting graph on the RateSetter provision fund page –  it shows that the current default rate is 1.18% and that it would have to reach over 11% before lenders stop receiving full interest payments and 20% before their capital is at risk – details here https://www.ratesetter.com/lend/provisionfund
  • Are you able to access your money if you need it in an emergency – what does this involve and are there any charges for this?

Update: 6 April

The Innovative Finance ISA launches today (6 April), however as things stand, many of the big name peer-to-peer platforms are still waiting for FCA authorisation to offer the ISAs. A handful of smaller platforms have received FCA permission – Go2Partners, Crowd2Fund, Formax Credit UK, Resolution Compliance, Clasp Investment, Edaid, Gracombex, Abundance, CrowdStacker and Funding Tree. But the larger names are still waiting – and these platforms could offer more competitive deals, so it might be worth biding your time if you are looking to invest.

 

There are 1 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.
  • Shilpa Das

    Nice Post! LoanMeet is a Peer To Peer P2P Lending marketplace that brings borrowers and lenders together on the common platform to get Personal and Business Loans.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Which ISA is right for you? A round up of the six products available in 2017

From cash to innovative finance to lifetime, here's our guide to the ISA products available to savers this yea...

Guide to buy-to-let tax changes

In late 2015, former Chancellor George Osborne announced a range of  tax measures aimed at landlords, which t...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Five fund tips for a 0.25% interest rate environment

With interest rates stuck at a record low 0.25% and expectations rates could fall to close to zero, here are ...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Investing your money

Alliance Trust Plc gives you smart insight into how to invest your money

Money Tips of the Week

  • RT @EdenTreeIM: Is the rise of automation an opportunity or a threat for society & investors? Neville White examines in @YourMoneyUK https:…
  • RT @EdenTreeIM: Is the rise of automation an opportunity or a threat for society & investors? Neville White examines in @YourMoneyUK https:…
  • Is the rise of automation an opportunity or a threat for society & investors? Neville White examines in… https://t.co/kfIpq3Mv4I
Read previous post:
probate
Plans to change probate fees: what you need to know

The government plans to change the probate fee structure from a flat rate to a banded system. In doing so, it...

Close