Peer to peer platforms do not lend money directly, but connect lenders (investors) with borrowers.
As the middle man is cut out (the banks) borrowers can benefit from reduced interest rates, and platforms can offer lenders better interest rates in kind, with the aim of benefiting all parties.
Higher interest rates for Lenders
(Compared to a Savings Account)
Lower rates for Borrowers
(Compared to a Bank Loan)
|Savings||Up to £85,000 per person per financial institution is protected under the Financial Services Compensation Scheme (FSCS)||Lower interest rates compared to Peer to Peer lending|
|Peer to Peer||No Security
(unless a 'Provision Fund' is provided*)
|Higher interest rates compared to traditional savings accounts|
*Some Peer to Peer providers have a provision fund set aside to cover lenders in the case of a borrower default, and often take security on loans as well that can be sold in addition to minimise the risk to any investor. Each platform is different, so make sure you compare before deciding.
The money you invest is assigned to one or multiple loans, which will pay the loan back (with interest) via the platform you have chosen. Your returns depend on the type of loans lent against, and the length of time you lend your money for.
With rapid year on year growth, financial experts predict that Peer to Peer is here to stay. And with the Government recognition of the industry in the new Innovative Finance ISA, we believe Peer to Peer lending is only set to grow further.
Predicted growth of the UK P2P funding market (£m)Predicted by Equity Development
The Innovative Finance ISA:
From it’s launch in April 2016, the innovative finance ISA has made Peer to Peer investors eligible for tax free interest.
With the rapid growth of Peer to Peer, the regulators have been watching the industry closely. Since April 2014, the Financial Conduct Authority (FCA) has required all Peer to Peer companies to be regulated and authorised by the FCA and PRA.
The FCA rules state that Peer to Peer platforms must present information clearly, be honest about investors capital being at risk and have plans ready to compensate investors should things go wrong. All Peer to Peer platforms must meet these rule or face sanctions, which can include large fines.
By April 2017 Peer to Peer Lending is due to get more secure!
All Peer to Peer platforms are due to have a minimum of £50,000 reserves capital, with the aim of becoming a buffer to help protect against financial shocks or difficulty.
Curious to find out more? See what returns you could expect from Peer to Peer lending platforms with our smart search below.