Reader Question: What is Peer to Peer Lending?

What is Peer to Peer LendingIt can be tricky knowing where best to save your money. Cash ISAs aren’t currently offering great returns, and savings account interest rates are slumping.

With these rather unappealing options on offer, many savvy savers are wondering – where exactly should you be storing your hard-earned pennies?

There is another place where you can invest your savings – and that’s peer to peer lending. You may be wondering ‘what is peer-to-peer lending’, as it’s not a form of investment that’s quite entered the mainstream yet.

However, if you fully understand the peer-to-peer lending process and the risks involved, it can be a lucrative place to invest your money. Here’s some more information.

What is Peer to Peer Lending?

Peer-to-peer lending, which is sometimes referred to as p2p lending and crowd-lending, is based on a fairly simple concept. In basic terms, peer-to-peer lending sites match borrowers or businesses with savers who want to make a good return on their money.

The process cuts out any need for a middle-man, which means that borrowers enjoy slightly lower rates, and savers get better returns.

Is it an Investment or a Form of Saving?

So, what is peer to peer lending, exactly? Are you actually saving your money, or is it an investment?

The simple answer is – it’s a little of both. Like an investment, there is an element of risk involved. However, like a savings account, your money will be set aside and you’ll earn a rate of interest against your savings.

Rates are usually better than those offered by high street banks – which is certainly attractive.

However, higher rates present additional risk; the most prominent being that you may not get your money back if the borrowers you’ve lent your money to are unable to repay it.

What are the Advantages Peer to Peer Lending?

There are a few significant advantages to investing your cash into a peer-to-peer lending site. Here’s the main ones:

1. Greater Returns

With better returns than most banks and well-known financial institutions, it’s unsurprising that peer-to-peer lending sites are picking up popularity. Returns vary – from 3% to 10% typically.

2. Social Connection

Another aspect about peer-to-peer lending that tends to be appreciated is the opportunity to invest money into projects that appeal on a personal level. After all, by lending money to start-up businesses, you’re effectively helping others to succeed – which is a great thing to do.

3. Interest

There’s something fascinating about the process – discovering more about entrepreneurs, their innovative ideas and what they’ve got planned for the future!

Are There Any Risks Associated with Peer to Peer Lending?

what is peer to peer lending risk-reward As with any form of financial investment, there are risks involved – and it’s important to be aware of them. The most notable risks are:

  1. Default in Payment. If the borrower is unable to pay you back, then you’ve lost your money.
  1. Lack of Protection. It’s important to note that these sites are not covered by the FSCS (Financial Services Compensation Scheme). This means that your savings won’t be guaranteed when you use a peer-to-peer lending site.
  1. No Interest Until the Cash Is Lent. You won’t receive any interest until your cash is actively lent out to a borrower. Most peer-to-peer lending sites offer ways to speed up the lending process, but this usually means you’ll get a lower rate of interest.

The Best Peer to Peer Lending Sites

We’ve now answered the question ‘what is peer to peer lending’ – which leads to the next big issue; which sites should you use if you want to give this form of investment a go?

Although still a relatively new form of lending and investing, peer to peer lending sites are growing in popularity, and there are now a number of sites to choose from.

However, there are three main sites that most savers use:

  1. Zopa is the UK’s longest running peer to peer lending site, and has been in operation since 2005. It underwent some significant changes in 2013, and now, it feels a lot more like a conventional savings account. Current rates are 3.8% for three years and 5% for five years after fees and bad debts (before tax). Zopa charge a flat fee of 1% each year of the loan.
  1. Unlike Zopa, Ratesetter doesn’t charge a fee, and offers rates of 3.2% (monthly), 3.8% for one year and 5.9% for five years, after fees and bad debts (before tax). It functions in a very similar way to Zopa, though is less well-established. However, rates are currently better.
  1. Funding Circle. Funding Circle lends only to businesses, and currently offers the highest rates of return – a whopping 7.1% after fees and bad debt (before tax). However, it’s also the riskiest site – though you can spread your investments using the site’s Autobid system, which reduces this to a certain extent.

What is Peer to Peer Lending to You?

Peer-to-peer lending tends to evoke a ‘marmite’ reaction. It has many passionate advocates, who enjoy great returns and enjoy this innovative, interesting form of lending.

However, others are wary about the risks involved, and would rather stick with the security of a conventional savings account.

What do you think about peer-to-peer lending? Have you had any personal experience with it? We’d love to hear all about it!

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