How peer-to-peer lending works
Peer-to-peer lending means lending money to individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other financial institution.
Companies such as Zopa work by matching individual lenders and borrowers online.
This means great rates for both borrowers and lenders because it’s more efficient.
Peer-to-peer lending (or P2P lending) is also known as social lending and lend-to-save.
How does Zopa work?
Zopa makes money by charging a low, transparent fee. There are no hidden charges or sneaky clauses so our lenders and borrowers get a good deal.
Borrowers pay the borrowing fee only when their loan application is approved. The borrowing fee is added to the loan amount and always included in all our APR quotations.
Peer-to-peer isn’t just our business, it’s our mission. We’re committed to giving people great rates and excellent customer service. We believe that people who are good with their money should be properly rewarded, and that’s how Zopa works.
Is peer-to-peer lending too good to be true?
The Guardian – Rupert Jones
Saturday 15 February 2014 06.59 GMT
Websites that bypass the banks by matching up savers with borrowers are taking off in a big way – and with some claiming to offer returns of 10%-15%, it is no wonder punters are piling in.
New companies seem to be launching almost weekly, prompting suggestions that this will be the year that “peer-to-peer lending” explodes into the mainstream. So should you be signing up – and is it safe?
What are they? Peer-to-peer lending sites put savers with money to lend in touch with individuals or small businesses that need to borrow. The idea is that both benefit from better rates than they could get from financial institutions. The three best-known players are Zopa, Funding Circle and RateSetter, but lots of others are snapping at their heels.
Next month, City “superwoman” Nicola Horlick (right) will join the fray, with the launch of a peer-to-peer website called Money & Co. Like many of the new sites it will allow people to lend money to small and medium-sized enterprises and enjoy returns which she estimates could initially average 8% gross, reducing to 7% after fees.
Money & Co is due to go live on 17 March, and the mother of six, whose business ventures already encompass the worlds of investment, movies and restaurants, told Guardian Money that out of all the things she has done in her career, “this is one of the most exciting. There’s a real need. It will help companies, help the economy, and help individuals to get a better return on their cash”. She believes the sector is still in its infancy, but adds: “I would expect us to be one of the winners … Our system is built to be global.”
How do these sites work for savers? They all operate in different ways, and the sites that lend your money to businesses tend to offer higher rates than those lending to other individuals. Some, such as Zopa and RateSetter, are at the mainstream end of the sector, while others are more niche or high-end. In the case of Zopa, the UK’s biggest and best-known peer-to-peer site, you choose how much you want to lend (the minimum is £10) and the period (up to between three and five years). Your money is then lent in small chunks to a number of borrowers, and you receive repayments each month, made up of interest and the money you lent out.
What about returns? Zopa says its lender investors can expect to make 4.9% interest over five years, after its 1% annual fee is deducted, or 3.9% over three years. Some may feel that isn’t enough, bearing in mind the risks.
RateSetter this week quoted rates of 1.9%-5.5%, while Funding Circle, where people lend to businesses, says its investors are earning an average of 5.7% after fees and bad debt. Some of the smaller or newer sites quote higher rates – rebuildingsociety.com boasts of an average gross yield of 15.6%, while ThinCats claims lenders can earn 6%-13%.
Why are they growing in popularity? According to industry trade body the Peer-to-Peer Finance Association, the sector more than doubled in size in 2013. That is mainly because of a perfect storm of factors: years of rock-bottom interest rates that have prompted desperate savers to seek out alternatives; a lending freeze that has hit consumers and small businesses hard; and a string of financial scandals that have led to a loss of trust in Britain’s banks.
Any downsides? Yes – there is little regulatory protection for investors and borrowers, though this is about to change. From 1 April peer-to-peer lenders will be policed by the Financial Conduct Authority (FCA), which will mean more rights and greater protection for those who use them. There will be minimum capital requirements, rules to protect “client money”, and a requirement that steps are taken to make sure repayments on existing loans would continue to be collected if a site went bust.
But, crucially, peer-to-peer sites aren’t covered by the official Financial Services Compensation Scheme , which guarantees your savings up to the value of £85,000 – and there are no plans to change this. Neither should you assume you can immediately access your cash: each operator has different rules, but your money might be locked away for months or longer.
Worryingly, when the FCA reviewed 21 peer-to-peer websites last August, it found that many “downplayed” the risks and used “misleading and potentially unfair” comparisons with bank and building society accounts. The regulator warned that some sites were emphasising a headline rate of return “that is often in double figures, without an explanation of the impact of charges, default rates and taxation”. It added: “In some cases it appears the actual returns to customers can be substantially less.”
If you’re tempted
• Think about whether this is right for you, and do your research. Look at our mini-profiles and play around with the company websites. Ask friends and relatives if they have used any of the companies and how they got on.
• Be aware of the risks. The FCA reckons that referring to the lender investors who use these sites as “savers” may be “problematic” because peer-to-peer is “higher risk” than putting your money in a savings account. If you’re not comfortable with this, it may not be for you.
The most obvious risk is that a borrower fails to pay you back. However, several of the sites operate a fund or similar scheme that will cover a lender’s losses in the event that a borrower is unable to repay. Zopa has the “Safeguard” fund while RateSetter has the “Provision Fund”.
In theory you could also lose some or all of your money if the peer-to-peer website itself went bust, because these are not covered by the FSCS.
Many of the sites insist that funds not on loan are held in a ring-fenced account, and that in the event that the site went bust your contracts with borrowers would remain in force, and they would be contractually obliged to repay you. says: “Generally, the higher the potential returns, the higher the risk a borrower you’ve lent to might not repay.”
Spreading your money between several peer-to-peer sites is one way of spreading your risk.
• Make sure you are clear about the fees and charges. The fee structures vary across sites. Zopa lenders, for example, pay a 1% annual fee on the amount they lend to borrowers, which is deducted monthly from their holding account balance, while RateSetter charges lenders 10% of the interest they receive. Funding Circle charges a 1% fee on all lending.
• Start with a small amount and give yourself a few months to see how you get on. That’s the advice from reader Daphne Spreull who has money tied up with five peer-to-peer sites: Zopa, RateSetter, Funding Circle, ThinCats and FundingKnight.
“The rates of return are good. They are better than you can get with any bank or building society, although the headline rates are now a bit lower – you’re looking at interest rates, after bad debts, of between 4% and 5%.”
Spreull, who lives near Manchester, says it is good to give it a few months so you can get used to seeing the repayments come in and how it all works. She says that for a beginner, she would suggest RateSetter or Zopa.
• Don’t forget about tax. Typically, all returns are paid without any tax (even basic rate) deducted, so you should declare your gains to HM Revenue & Customs. You need to include interest received from peer-to-peer lending on your tax return. And there’s some bad news – HMRC says: “An individual lending as part of an investment would need to pay tax on the gross interest income earned. There is no relief for bad debts or platform fees.”