Is it Peer to Peer Lending a Safe Investment?

Israel's 1st social bank set to offer credit to those who find it out of  reach | The Times of Israel

Peer to peer (P2P) lending, is designed to cut out the middle-man between savers and borrowers, by offering a platform where people can lend to (and borrow from) each other directly (or semi-directly).

But is P2P lending safe? How much could you make, or lose – and what’s the risk of not getting your money back?

How To Get A Bad Credit Loan? – Green Record

The first UK P2P lending firm, Zopa, opened in 2005 and today has over 76,000 lenders.

Read on to discover the advantages and disadvantages of peer to peer lending and more.

What is peer to peer lending?

Personal loan vs. credit card: Which option is right for you? | Fox Business

Peer to peer (P2P) lending lets people lend money to those who wish to borrow it, without going through a bank.

This more direct approach allows lenders to earn a higher rate of interest, and borrowers to pay a lower one, because the P2P platform has fewer overheads than a bank.

P2P lending doesn’t cut out the middle-man completely. The P2P platforms still do a lot of heavy lifting, such as vetting borrowers, chasing repayments on the lenders’ behalf and managing the transactions, and for this they take a cut of the money.

Nevertheless, financially it works out as generally better for both lenders (i.e. savers) and borrowers – although at higher risk for the lenders than they would face with a simple bank account. 

How does peer to peer lending work?

10 Bad Credit Loans That Don't Need a Cosigner (2022) |

There are plenty of P2P platforms to choose from. As a lender, you’ll register with a chosen platform and pay in money using a debit card or direct transfer.

You’ll set or agree to a fixed interest rate and choose the period of time you’d like to lend the money for (typically one to five years).

At the end of this term, once your loan has been re-paid with interest, you can withdraw your cash or invest your profits again to grow your money further.

Some sites let you select exactly who you’d like to lend your money to. However, it’s more common for sites to divide your money between several borrowers to manage risk on your part (more on that later).

There are different products on offer, each with varying interest rates, risks and terms of withdrawal. For example, you could invest £1,000 for two years at a fixed interest rate of 3.5%, with a 1% fee on total funds if you wish to access your cash early.

If you’re thinking of becoming a lender, run through these options with your independent financial adviser (IFA), so that you know exactly what you’re getting into. 

Is peer to peer lending safe?

4 Alternatives to Using a Credit Card for Big Purchases | MyBankTracker

P2P lending is also known as ‘investing in loans’. Just like any form of investment, potentially securing from a return from a P2P loan means taking a financial risk.

In the UK, every P2P platform is regulated by the Financial Conduct Authority (FCA). This protects lenders from malpractice by the provider. However, it doesn’t protect you from losses or provider insolvency.

Unlike banks or building societies, P2P lenders are not covered by the Financial Services Compensation Scheme. This means that if the platform goes bankrupt, your money could be lost altogether (though as a creditor you might receive something through the liquidation process).

Similarly, if the money you loaned is not paid back, you’re not protected by the government and may lose money.

Many of the bigger P2P platforms have a large reserve fund to protect against this, so that money can be repaid to lenders even if the borrowers default. However, such emergency funds are not bottomless, and in exceptional circumstances (such as a financial crisis or a ‘run’ on that platform) they might be exhausted.

In this scenario, you might first lost out on your predicted returns, and eventually (in a worst-case scenario) lose your entire investment. The probability of this isn’t high, but it’s not zero. 

Is it common for P2P borrowers to default on their loans?

The difference between Credit Files, Scores & History | Mozo

Borrowers defaulting is one of the biggest risks with P2P lending but, thankfully, reputable companies plan for this outcome.

The major P2P lending platforms make an effort to be transparent, either giving each borrower a risk rating or factoring ‘bad debt’ (i.e. borrowers who might not pay) into your projected return.

You’re able to see this rating or risk category when investing, so that you can make an informed choice based on your risk tolerance.

Generally speaking, the higher the interest rate offered, the greater the financial risk. 

What are the other risks of peer to peer lending?

Notice of Default: What Is It and What Does It Mean? - NerdWallet UK

With P2P lending, you make money based on the interest rate you set or agree to. Typical interest rates can vary from 1% to 6%, depending on the risks you’re willing to take. Even higher interest rates can be found, but again, this implies much higher risk of losing your money.

In addition to the risk of losing money, the three other main risks of P2P lending are:

Risk of not getting your expected return

If a borrower repays your loan early or late, you could make less profit than anticipated. Your money also only starts earning interest once it has been lent out, not while it’s sitting in your P2P account waiting for borrowers.

It could take a few days to find a borrower or, if you’re investing a lot, it could take longer for it all to be loaned.

Risk of a P2P platform going out of business

It’s possible for P2P providers to fold. UK firm Lendy collapsed in 2019. P2P platforms are still relatively new and are yet to be tested by severe economic recessions or other significant market disruptions.

For this reason, the FCA requires P2P lending platforms to keep lenders’ money in ring-fenced accounts separate from their own. Many of the big UK P2P lending platforms use Barclays.

It can be tricky to withdraw your money early

Many P2P lending platforms give you the option to withdraw money early. However, it might not be available to take out immediately, or you might be charged interest for it.

One of Ratesetter’s products, for instance, charges 30 days’ interest to access your money before term. Be sure to check the fine print carefully when making your choice. 

What are the benefits of peer to peer lending?

Understanding the Financial Planning Process - SmartAsset

For those willing to accept the risk, P2P lending can generate a good return and don’t require much effort, as the platforms do most of the admin and debt-chasing.

Additionally, money earned through P2P platforms is usually classed as income. That means it’s taxable, though most lenders won’t pay any tax thanks to the personal savings allowance.

With this allowance, basic rate taxpayers can earn up to £1,000 of tax-free interest per year (or £500 for higher rate taxpayers). 

Which companies do peer to peer lending?

Peran Penting Pendistribusian Dana dalam Peer-to-Peer Lending | Midtrans

There are several P2P lending platforms in the UK, with more popping up every year. However, the major players include Zopa, Funding Circle and Ratesetter. Together, these platforms have an estimated 240,000 lenders.


Zopa is the UK’s original P2P platform and it was established in 2005. It offers average interest rates of between 2.3% and 5.6% after bad debts. Zopa spreads your money across multiple borrowers, who they risk-rate from A to E, with E being the most risky.

Funding Circle

This platform offers average rates of between 4.3% and 6.5% after bad debts, making it rewarding, but riskier. Lenders’ money is spread between many different borrowers; at any time, no more than £10 of your money will go to a single borrower. The average loan amount is £60,000 and, to date, the platform has lent over £550 million to UK businesses.


Launched in 2010, Ratesetter offers interest between 3% and 5% and requires a minimum investment of just £10. It boasts an effective provision fund – protecting lenders against borrowers who fail to re-pay all or a portion of their loans. 

How much should I put into peer to peer lending?

Bagaimana Cara Kerja Bisnis Investasi Peer to Peer Lending? - IQ Bisnis

As you can see, you can get started on a P2P lending platform for as little as £10, with no maximum limit. That said, the Financial Conduct Authority (FCA) in the UK has imposed a limit for first-time P2P lenders to protect them against defaulting.

Under the rule, new investors are not allowed to put more than 10% of their investable assets into a P2P lending platform, unless they have had independent financial advice. Every P2P platform in the UK is FCA-regulated, so they’re obligated to comply.

If you’re keen on becoming a P2P lender, it’s worth taking the venture on as part of a balanced portfolio of other investments, so that you’re managing your risk.

Work with your IFA to select a P2P investment amount suitable for your budget, goals and risk appetite. But remember the golden rule: never put in more than you can afford to lose.

One of the biggest mistakes people make with P2P lending is treating it as a savings scheme (as it may superficially resemble one), instead of a medium-high risk investment.

What are the alternatives to peer to peer lending?

Tips Memilih Perusahaan Investasi Peer to peer (P2P) Lending Yang Dapat  Dipercaya | Opini Terbaru

One alternative to using P2P lending directly is the innovative finance ISA. This is still a form of P2P lending, but your loans are held in an ISA tax wrapper so that you don’t pay income tax on the interest.

Another alternative to P2P which works in a similar way is to buy corporate bonds. These are also a form of loan to businesses, but may be lower (or higher) risk than P2P loans, depending on the company involved.

Christopher Rutayohibwa

12 thoughts on “Is it Peer to Peer Lending a Safe Investment?

  1. Thank you for another magnificent article. Where else could anyone get that kind of info in such an ideal way of writing? I have a presentation next week, and I am on the look for such info.

  2. Right here is the perfect website for anybody who wishes to find out about this topic. You know a whole lot its almost hard to argue with you (not that I personally would want toÖHaHa). You certainly put a new spin on a subject that has been written about for decades. Excellent stuff, just excellent!

  3. Great post, I truly had a great time reading it. Your writing style is very captivating and your insights are highly relevant. Thank you for sharing!

  4. Reading your article helped me a lot and I agree with you. But I still have some doubts, can you clarify for me? I’ll keep an eye out for your answers.

  5. Thank you, I have just been looking for info approximately this subject for a long time and yours is the greatest I’ve came upon till now. But, what in regards to the bottom line? Are you positive in regards to the source?

  6. I think other site proprietors should take this web site as an model, very clean and great user genial style and design, let alone the content. You are an expert in this topic!

  7. I don’t know if it’s just me or if everybody else experiencing issues with your website.
    It appears as though some of the text within your content are running off the screen. Can someone else please comment and let
    me know if this is happening to them too? This may be a issue with my
    internet browser because I’ve had this happen previously.
    Thank you

  8. Greetings from California! I’m bored at work so
    I decided to check out your site on my iphone during lunch
    break. I enjoy the information you provide here
    and can’t wait to take a look when I get home. I’m shocked at how quick your blog loaded on my phone ..
    I’m not even using WIFI, just 3G .. Anyhow, awesome site!

  9. I have to thank you for the efforts you have put in writing this site.
    I really hope to check out the same high-grade content from you
    in the future as well. In truth, your creative
    writing abilities has inspired me to get my own blog now 😉

  10. Excellent beat ! I wish to apprentice while you amend your web site, how can i
    subscribe for a blog site? The account aided me a acceptable deal.

    I had been tiny bit acquainted of this your broadcast provided bright clear concept

  11. Numerous of the content I’ve perused on this site are worth bookmarking for future reference. I am curious as to how much effort you put into developing such an exceptionally instructive website.

Leave a Reply

Your email address will not be published. Required fields are marked *

Follow by Email