The leading peer-to-peer platforms compared
Peer-to-peer lending (P2P) is a relatively new way for savers to get better returns on their savings compared with rates offered by mainstream savings accounts. The sector celebrated its 10th birthday earlier this year.
The sector has grown significantly since its creation. Two years ago, it became regulated by the Financial Conduct Authority (FCA). In the July Budget, Chancellor Osborne announced P2P loans would become eligible for inclusion in a dedicated ‘Innovation Finance’ ISA as of April 2016.
Despite these developments, P2P remains on the fringes of the financial sector. According to figures published by the P2P Finance Association, the industry lent a relatively small £1.2bn last year overall.
This is almost certainly attributable to saver wariness of the sector. Investments are not protected by the Financial Services Compensation Scheme, meaning you will lose all your money if a firm goes bust. Unless a firm has its own compensation structure, there is little way of getting any money lost to a defaulting borrower back.
As a result, for anyone looking to get involved with peer-to-peer lending, choosing the right platform is crucial. At the moment there are 72 officially mandated P2P lenders in the UK, with a further nine awaiting FCA license.
Here, YourMoney.com compares the features and risks of the industry’s three largest platforms.
Total lent: £897m
Lends to: Businesses
Six months – five years
Average annualised return (after defaults and before tax) is 7 per cent, although returns vary based on borrower risk rating (companies are ranked A+ to E).
Lenders pay an annual fee of 1 per cent.
If a lender sells any part of their loan to another investor, they incur a 0.25 fee.
The platform’s average default rate has ranged from 0.6 per cent for A+ companies to 11.2 per cent for D companies.
Lenders can diversify by splitting their investments across businesses to reduce risk. Investors in the firm’s ‘100 Club’ do this by investing in 100 companies overall, with no more than 1 per cent of their money invested in any one company.
Total lent: £865m
Lends to: Individuals (70 per cent) and businesses (30 per cent)
One month to five years
Lenders select the rates at which they wish to lend.
Average rates on a one-month rolling loan are 3.1 per, one-year 3.7 per, three-year 5.6 per, five-year 6.2 per cent.
Only creditworthy applicants can borrow, with four in five applications declined. The firm utilises the same credit checks as major banks and runs affordability assessments.
RateSetter pioneered the ‘provision fund’, which reimburses lenders in the event of a missed payment or outright default. The fund is subsidised via risk-weighted mandatory contributions from borrowers, and currently holds £16m.
While lender recompense is not guaranteed, to date no lender has lost money using the platform, unique among P2P platforms.
The platform has had an average default rate of 1.2 per cent over the past five years.
RateSetter is the first P2P platform to be risk rated by ratings agency FE. It was given a risk score of 1, placing it just above cash’s risk rating of 0.
Total lent: £1.14bn
Lends to: Individuals
Two to five years
Average annualised return (after defaults and before tax) is 5 per cent. Prospective lenders can use the firm’s online calculator to roughly estimate returns in advance.
Lenders pay 1 per cent of the money they lend in fees annually, with a 1 per cent charge also levied if you want your money back before the end of the term. Another lender must also be found to replace you.
Income can be withdrawn without charge.
Strict lending criteria
Physical underwriting and assessment team, equipped with constantly updated credit data sourced from credit bureaux and banks. Only 20 per cent of applicants are accepted.
Lender money split is between borrowers, with no more than two per cent of a lender’s investment lent to a single borrower. Only a fraction of an investment will be lost in the event of a default.
Zopa operates a ‘safeguard fund’. Any loan four months in arrears is assigned to the fund, which can pay affected lenders outstanding loan amounts with interest.
Compensation is not guaranteed, but since its launch the fund has paid all lenders affected by defaults. Currently the fund holds £11m for reimbursement.
The platform has had an average default rate of 0.6 per cent over the past five years.