Warning: The COVID-19 pandemic had a serious effect on the peer-to-peer market. Although this article has been updated and reflects this, you should still do your own research and proceed with caution.
I've had a small amount of money in peer-to-peer lending (or “P2P lending”) since its earliest days, and now keep a fair bit of my semi-liquid cash there. In this article I'll tell you probably more than you really need to know.
Peer to peer lending UK: What is it?
In its simplest form, peer-to-peer lending is just lending money to another person (or business) without a bank getting involved in the middle.
Peer-to-peer lending is often confused with crowdfunding, but they're very different investments. I have an article about UK property crowdfunding here.
It's clear to see why this is attractive. Normally you put your money in the bank, the bank gives you about 0.5% per year if you're lucky, then they lend it out for much more. Without the bank taking a big slice in the middle, you get a higher rate of return.
You still need someone in the middle bringing both sides together and facilitating the process, and that's where peer-to-peer platforms step in. The first in the UK was Zopa, which has been operating since 2006 – and over the last few years, tens of new platforms have come into the market. Each platform offers something slightly different, which we'll come to later.
At first, lending money directly to another individual might sound risky: what happens if they don't pay you back? In practice though, you'll spread your money across lots of different borrowers – so even if one doesn't repay, you'll only lose a small amount.
Why bother with peer-to-peer?
The attraction of P2P is that it scores highly on three different measures: safety, liquidity, and interest rate.
Let's take the basic case of leaving your money in the bank. It's safe (in theory) and liquid (you can access it any time), but the rate of interest is either low or non-existent.
Alternatively, you could invest it in a property. It's still relatively safe (properties tend to hold their value over the long term), you can get a high return if you buy well, but it's illiquid: if you want your money back, it takes time to sell the property.
P2P lending scores well on all three: it's relatively safe and relatively liquid, while still attracting a relatively high rate of interest. If you split your money across multiple borrowers you have negligible risk of major loss, you can quickly sell loans (under usual market conditions) to get your money back, and the interest rate is a lot better than you'd get in the bank.
As a property investor you could decide, for example, to keep your savings in P2P instead of the bank while saving up for your next purchase – or you could keep your emergency fund there. Or, as a business owner, if you put money aside to pay your end-of-year tax bill you could keep that in peer-to-peer until you need to pay it over.
Again, it's not guaranteed to be risk-free or liquid, but you might decide that it's worth taking a bit more risk to get a bit more of a return.
You can also wrap your investments within a peer-to-peer ISA so you don't get taxed on the interest you make. Read my full article to learn how this works, and what you need to keep in mind.
Is peer to peer investing lot of work?
Getting a higher return than you would in the bank is all well and good, but there's not a lot of point if you have to dedicate all your spare time to assessing different lending opportunities, re-investing cash when loans end, and so on.
So, do you have to be that hands-on? Well, you can be – there are some internet message boards where people discuss individual loans in unbelievable detail, and seem to spend all their time finessing their peer-to-peer portfolio.
But you don't have to. Some platforms let you pick individual loans, whereas others hide all that away: you put money into the platform, then they spread it across different loans behind the scenes. There are also platforms that give you a choice: you can either pick individual loans, or automatically invest a certain amount into every new loan that comes up until you reach your limit.
In other words, it's as much work as you want it to be: everything from “I get to live out my fantasy career as a fund manager” to “My eyes have glazed over already – just show me the interest”.
Once we've covered a bit more background on the peer-to-peer landscape, I'll show you how to invest in a way that suits the amount of time/brainpower you want to dedicate to it.
Different types of peer-to-peer lending
There are three main “flavours” of peer-to-peer lending:
- Lending to consumers
- Lending to businesses (technically P2B, but let's not quibble)
- Lending against property
Some platforms will offer all three types of lending, while others focus on just one. You don't need to know about this in masses of detail, but it's helpful to get a sense of how your money could be used – and what the risks of each type are.
Consumer peer-to-peer lending
Consumer lending is how peer-to-peer started: lending money to another individual for what could be any reason. In the earliest days of Zopa, borrowers could actually say what they wanted the money for and you could choose which projects were “worthy” of your cash – whether it was for a new kitchen, a holiday, or to cover a gap in employment.
The reasons are now mostly hidden away and the platforms decide who to lend to, but consumer lending is still effectively the same thing. The important thing is that these loans are unsecured: there's nothing (like a house) held as security, so if the borrower defaults there's little chance of recovering any of the money.
Business peer-to-peer lending
Lending to businesses can be to fund expansion, inventory, or to help cashflow during a difficult period. Business lending can be secured against property, but at the very least it will usually be personally guaranteed by the directors (who tend to have assets) and secured against the assets of the business (like equipment and stock) too.
Property peer-to-peer lending
Lending against property generally isn't for people buying houses to live in, nor for investors who want a long-term mortgage. Instead, it tends to be for short-term refurbishment or development projects.
Property lending has risks too, of course, because there's always the chance of a project going wrong: a development running into trouble, a “flip” project being unable to find a buyer, and so on. But the benefit is that the loan is secured against the property – so if the borrower defaults, the property can be sold to recover at least some (usually all) of the money owed.
Is peer-to-peer lending safe?
As I said earlier, there's risk in peer-to-peer as there is in any investment. The important thing is to understand where the risk lies – which we'll do in this section – and after that, we'll run through the actions you can take to keep this risk as low as possible.
Loans going bad
The most obvious risk is the borrower being unable or unwilling to pay you back. It can happen with any type of loan, but the risk is more pronounced when the loan is unsecured because there's nothing you can seize to get at least some of your money back.
By its nature, peer-to-peer suits borrowers who are unable to get funding from banks at lower rates because they're a higher risk – so however much you trust the platform's underwriting, it's rational to assume that some proportions of your loans will go wrong at some point.
A less visible risk is the actual lending platform getting into trouble. The majority of peer-to-peer platforms in the UK are currently operating at a loss: they have backers who are expecting to absorb these losses for a number of years, but it's entirely possible that a platform could go out of business. Indeed, one UK-based platform was closed down by the FCA in 2018 and investors are still (at the time of writing) waiting if they'll ever see their money again.
Any decent platform will have arrangements in place for if something goes wrong, and in theory someone else will step in to ensure that all loans are wound down in an orderly way. However, in practice that can be a messy process and you can't guarantee how long it will take to get your money back – if you do get it all back.
Unable to access funds
I said earlier that the advantage of peer-to-peer was that your funds are relatively liquid under usual conditions. This is because many platforms have the facility to sell your loan agreements to other investors – something often called a “secondary market” – and usually, there will be plenty of investors standing by willing to buy what you're selling.
However, like all markets, peer-to-peer is all about confidence. If there's a general loss of confidence in the economy or a specific loss of confidence in a particular platform, everyone could want their money back all at the same time – just like a run on a bank. If that happens, there could be lots of loans being sold and none being bought – meaning that you can't get your cash out.
This is exactly what happened in 2020 when the Covid-19 pandemic hit. Suddenly, all asset prices crashed as everyone panicked and just wanted to get their hands on cash. People were queueing up to get their money out of the peer-to-peer lending platforms, and no-one was on the other side putting money in – so overnight, a supposedly somewhat liquid investment became illiquid.
The underlying loans should still continue to perform in this situation (as indeed they did in 2020 for the most part), but it's important to be aware that the liquidity aspect doesn't hold under all conditions.
How to stay safe with peer-to-peer lending
If you're still reading after hearing all the risks I've just run through, you're clearly made of reasonably stern stuff – and peer-to-peer investing might be for you.
I hope that is the case, because while it's important to understand the risks I don't mean to overplay them – especially as there's a lot you can do to control that risk if you invest your money intelligently. Here's how…
1: Pick the right peer to peer lending sites
Personally, I see “platform risk” as the biggest danger of peer-to-peer lending: some loans are always going to go bad, but you don't want to deal with a whole platform running into trouble.
Even if a platform doesn't get into difficulty, there's still the risk that their loan selection will suffer: they might start saying “yes” to loans where they should say “no”, either because of inadequate staffing or the desire to grow.
(As I said earlier, on some platforms you can pick your own loans – but I still want to assume that every loan offered is basically fine to invest in, without having to do endless due diligence myself.)
So, what makes a good P2P lending platform?
A good track record
The longer the platform has been successfully running for, the better. Most will also display statistics about their historic defaults (including how much capital was recovered) and their expected loss rate.
Liquidity (under normal market conditions) is one of the big advantages of peer-to-peer.
One source of liquidity is an active secondary market. As I said, a “secondary market” allows you to sell your loans to other investors: in other words, you could lend to someone for a fixed term of 12 months but then sell your share of that loan to another investor two months later to get your money back.
Some platforms work differently, and hide the secondary market away – basically just giving you a “withdraw” option, and sorting out all the buying and selling behind the scenes.
Either is fine: I just want to know that I can have a reasonable expectation of getting my money out if I need it, other than under extreme conditions of economic uncertainty when (as we've already seen) all bets are off.
Good user and customer experience
If the website is a pain to use and you can't get help when you need it, it's not a good sign for how the operation runs as a whole – as well as just being annoying.
2: Diversify between loans
The golden rule of peer-to-peer is “eggs and baskets”.
The more loans you can spread your money between, the less affected you'll be by any one default. For example, if you split a £10,000 investment between 1,000 different loans, if one loan goes wrong you'll only lose £10 – which should be more than offset by the interest on the others.
As I said before, some platforms do this automatically – but if you're picking your own loans, you should split your funds between as many of them as you can.
3: Diversify between peer-to-peer lending platforms
This just takes “eggs and baskets” one step further. If you've split your money between lots of loans and they're all on the same platform, you could still be massively affected by anything that happens to that platform.
The failure of a platform shouldn't be a disaster because the underlying loan contract is directly with the borrower, and the platform should have arrangements in place for someone else to step in and administer everything if needed. But still, if it happens you don't want to be stressing about it any more than necessary – so diversifying between loans and platforms is the safest approach.
My principles for peer-to-peer investing
My aim with peer-to-peer lending is to make an overall level of return that I'm happy with, while taking up pretty much no time. What I aim for is:
- If I've got more funds to invest, I just pick a platform and chuck it in.
- If I need to withdraw funds to use the cash for another purpose, I just make a couple of clicks and it's done
- I don't need to actively monitor anything to keep my money working, or keep an eye on things to make sure I'm still happy with the risk level
To achieve that outcome, I've come up with four “principles” for what I invest in:
- Pick platforms, not loans
- Lend across a handful of platforms
- Favour asset-backed lending
- Look for an easy exit
This isn't going to be the right approach for everyone: for example, if your aim is to maximise your return regardless of time or risk you'll need to make different decisions
But in case your aims are similar, here's how those four principles help me to achieve my “decent hands-off returns” objective.
1: Pick platforms, not loans
Frankly, I have no desire to look into the likelihood of a particular piece of land getting planning permission, or scrutinise the balance sheet of a certain company to see if they can afford a loan.
Even if I enjoyed it, I'd get a far higher return on my time elsewhere: when it comes to my investments, I just want to set them up sensibly then let them run.
So, my approach is to only invest on platforms where either:
- You don't get to choose loans at all: you put your money in, and everything else happens behind the scenes
- You do invest loan-by-loan, but can automatically allocate a set amount of money to each new loan that comes onto the platform
2: Lend across a handful of platforms
If you wanted maximum diversification, you'd split your funds across every platform that exists – but beyond a certain point, the time and hassle involved just gets ridiculous.
So my personal rule is that I'll invest across a maximum of five platforms. At the moment, I'm on four.
You might choose a different number, but I find that this gives me confidence that I've got enough of a split without having to spend much time logging into different accounts to see what's going on.
3: Favour asset-backed lending
I have a strong preference for participating in loans backed by property: as long as the loan-to-value is sensible and the valuation is accurate, there's an extremely high chance that all the capital will be recovered even if the borrower defaults.
I'm fine with asset-backed business lending too – secured against business property, inventory, or other tangible assets.
I'm a little more wary about unsecured consumer lending, because there's very little recourse if they stop paying – although the loan sizes are smaller than to businesses, which helps because you can get more diversification with the same amount of money. I'll get involved with some consumer lending in the interests of diversification, but three of the four platforms I currently invest through don't lend to consumers at all.
4: Look for an easy exit
There needs to be the potential to get out early using the secondary market, whether that's a case of hitting “withdraw” and letting the platform do the rest, or being able to list specific loans I want to get out of.
These are the platforms I have money with right now. They may or may not suit you, I have no special knowledge of how they operate, and there may be better options out there that I don't know about.
Also, just because a platform isn't on this list doesn't mean I don't like it. I've dabbled with plenty of good ones, and I've got others on my list to play with: I'm just keeping it simple at the moment due to a lack of time.
And for completeness, I'll list a few platforms I've previously used but don't anymore and explain why.
Warning: The COVID-19 pandemic had a serious effect on the peer-to-peer market. Although this article has been updated and reflects this, you should still do your own research and proceed with caution.
Kuflink has been around as a lender since 2011, and opened up to peer-to-peer investors in 2016. It lets you either select individual loans to invest in, or use its auto-invest product.
All loans are secured by property, and loan terms range from three months to 12 months.
I choose to select individual loans, because the interest rate is better and it's possible to exit early by using their secondary market.
Somo (formerly known as The Bridge Crowd) is a platform where you can only choose individual loans to invest in (there's no auto-invest option), and suits investors with larger amounts to deploy as the minimum investment per loan is £5,000.
Somo offers the highest interest rate of all the platforms I use: I'm currently averaging 9.1%.
I'm under no illusions that their loans are at the risky end of the spectrum, and it's harder to get safety through diversification as the minimum investment amount is relatively high. However, I'm comfortable because they have a multi-year history of managing their loan book effectively.
There's a secondary market where you can sell loan parts, and it seems that anything listed on there usually gets snapped up quickly.
Loanpad is a new kid on the P2P block, and I'd normally want to watch and wait for longer before getting involved.
In this case though, I have confidence because Loanpad's loans come from a funding partner who's been in the business for nearly 40 years, and they keep the riskiest slice of the loan while passing on the safer part to Loanpad.
This means Loanpad's average loan-to-value is less than 40%, which makes it very appealing for the 4-5% return on offer.
Crowdproperty lends for development projects. These projects come with a lot of risk, but I've met their CEO and was very impressed with their processes for vetting loans before they go onto the platform.
There's an auto-invest option, which I use, although because there are lots of investors trying to deploy money on the platform it can take a while to become fully invested. You can also select your investments manually, which I've never tried to do so I can't comment on the experience.
Importantly, there's no secondary market at present – so once you're in, you're in.
I can't quite work out what I'm averaging in terms of interest rate, but I think it's around the 8% mark.
Platforms I no longer invest with
Assetz had a rough 2020 as a result of Covid. They offered a Quick Access Account where you could put your money in, they'd split it between lots of loans behind the scenes, then under normal market conditions (emphasis important) you could withdraw your money instantly and they'd re-allocate your loans to other investors.
However, when everyone suddenly wanted their money back at once, access turned out not to be so quick. Funds were locked up for a year or more in some cases, and they introduced extra fees to keep their platform stable.
I actually think they dealt with a very difficult situation pretty well, and everyone who wanted to withdraw their money could do so in the end. However, it woke me up to the risks of “instant access” type accounts that are a bit of a black box, and I now prefer to get my liquidity by having lots of different investments that mature at different times – so I can hold all loans until redemption and still having funds coming back regularly.
Assetz does offer this type of investing too, but there are other platforms that offer better rates or where I trust their origination more, so I've taken my cash elsewhere.
Ratesetter was very similar to Assetz in terms of how it functions: stick your money in, magic happens that you're unaware of, and you earn interest. The difference is that Ratesetter made loans to individual consumers and property developers as well as businesses.
Ratesetter also had a very similar 2020 to Assetz, i.e. not at good one. They were also hit with investors all wanting their money back at the same time, and again I don't think they did a bad job of managing the situation.
Would I have continued to keep money with Ratesetter after having a bit of a wake-up to their style of lending? No. But in any case, they were bought by Metro Bank and they closed to new investment, so that was that.
Lendy was one of the first peer-to-peer platforms I invested with, but after a couple of years things went south and a large proportion of their loan book ended up in default. In early 2019 I warned against using Lendy, and in May 2019 they went into administration.
I pulled most of my money off the platform in advance, but still had a bit in there when they collapsed. Interestingly, this means I now receive all the updates from the administrators who have been charged with winding the platform down and returning cash to investors. This experience has taught me that you really, really don't want a platform to collapse. Even though they are theoretically required to have a wind-down plan, administrators are not cheap and chances are there'll be very little left for investors (if anything) by the time they've taken their fees.
A useful learning experience.
I've gone heavy on the dangers just so you're well aware that it's not risk-free, but I remain a fan of peer-to-peer lending. The normal investing rules apply: do your research, and only invest what you can afford to lose.