Yes, peer-to-peer (P2P) lending platforms are safe to use and have been growing in popularity in the last couple of years and the industry became officially regulated by the FCA in 2019
In this guide, we take a closer look at what exactly is peer-to-peer lending, and how it works, explain everything you need to know about these innovative lending platforms. Understanding the potential risks that may occur before parting ways with your cash is essential.
What is peer-to-peer lending?
Peer-to-peer lending platforms connects investors with individuals or businesses who are looking to borrow money, without the banking middleman.
In other words, no financial institution is involved in the process. Peer-to-peer lending sites are simply a marketplace where you can find people anonymously to borrow from or give loans to and earn a healthy interest, often significantly higher than typical ISAs
Peer-to-peer lending can be beneficial for both parties involved. Investors can benefit from much higher returns on the money they have given out (for example, in comparison with rates from a savings account or IS). Whilst individual borrowers can usually pay less than they would with traditional loans.
How does peer-to-peer lending work?
The exact process for peer-to-peer lending may vary amongst providers, but the steps are typically as follows:
- Open an account with the peer-to-peer lender you have chosen. You will usually need to pay money into the account by debit card or bank transfer to activate the account
- Set the level of risk and interest you would like to receive on your investment
- Lend the money for a designated period of time (this may vary from lender to lender)
The rates you can earn through peer-to-peer lending as an investor will depend on the level of risk that you are willing to take on. Lending to those with bad credit histories offers greater risks but also greater returns. Meanwhile, lending to those with good credit histories is considered to be much safer but will offer a lower return as a result.
Some P2P lenders have an ‘auto bid’ option on their platforms, which allows you to set loan limits that you want to lend to per person or business. You can also do this for interest rates you are willing to lend at too.
What are the potential risks associated with peer-to-peer lending?
- The individual or business you are lending money to defaults or makes late payments
- You may not earn the maximum rate of interest if you withdraw early
- Your contributions are not covered by the Financial Services Compensation Scheme if something goes wrong
Individuals or businesses paying late or defaulting on payments
One of the main risks associated with peer-to-peer lending platforms is that the person or company you have given a loan to makes late payments or defaults on it entirely. That could result in only getting a portion of the interest you were expecting or there will be delay in getting the full amount or as the worst-case scenario you could lose part of your investment.
Fund Ourselves uses Auto-Diversify™ - so each investment will go to at least 10 borrowers to automatically diversify your portfolio and limit the risk of losing your expected interest.
The ability to withdraw money early
With peer-to-peer lenders, you can usually withdraw your money within 24-72 hours notices, however, it may take longer until your investment is transferred to another lender waiting in the queue to invest, you may not earn the full return expected, since you will probably need to let your investment run for the full period e.g. minimum of 12 months.
Not covered by the Financial Services Compensation Scheme
P2P lending platforms are not covered by the Financial Services Compensation Scheme which would guarantee you for any losses and is common for things like purchases through credit cards.
However, most reputable P2P firms, like Fund Ourselves have schemes such a provision fund in place to provide protection if something goes wrong. We have a full customer service team to follow up on any bad debts and have a provisional fund in place to remunerate you for any potential losses.