Peer-to-peer lending: what is it and how much can you earn?
Peer-to-peer (P2P) or social lending businesses have capitalised both on new technology and low savings interest rates to offer savers potentially better returns than they would get from conventional savings products.
In a nutshell, P2P lending companies are websites which cut out the financial middleman and allow you to lend directly to other individuals or businesses. You choose how much you want to lend, who you want to lend to and how much interest they should pay.
But there are still important differences between the key players in this relatively new market – let's take a closer look at who they are and what they do.
Lending to individuals
Zopa
Launched: March 2005
Minimum investment: £10
Average gross return: 3.5% to 6.5%, depending on length of investment and your attitude to risk
Zopa is one of the peer-to-peer originals, now in its 11th year.
In case of default, Zopa has a Safeguard Trust which pays investors the outstanding loan amount. There's no guarantee they will be paid but as claims on all loans have been covered so far, it looks a pretty solid safety net.
Repayments from borrowers are paid monthly and are made up of interest and capital. Returns can be re-lent automatically or withdrawn as income. However, you should be aware that there is a 1% early access fee on higher-return accounts.
Zopa is one of the founding members of the Peer-to-Peer Finance Association (P2PFA).
RateSetter
Launched: October 2010
Minimum investment: £10
Average gross return: 2.8% (monthly), 3.9% (one year) or 5.9% (five years)
As its name suggests, RateSetter is focused on customers setting the rate of return. You fund your account, decide how long you want to lend for and at what rate you want to lend at. You're then matched with a borrower.
Repayments are made up of capital and interest but you can withdraw or re-invest both, or just the capital.
RateSetter has a Provision Fund to protect investors which has recovered 100% of lost funds since it launched in 2010.
If you invest £1,000+ for a year or more, you can get a £100 bonus. However, those who don't want as much commitment are in luck as early exit fees have been removed on RatesSetter monthly offering.
RateSetter is also part of the P2PFA.
Lending Works
Launched: January 2014
Minimum investment: £10
Average gross return: 4.7% (three years), 6.3% (five years)
With 3,932 loans so far, Lending Works is also a big player in the P2P world.
The Lending Works Shield provides cover against borrower defaults, fraud and cybercrime, so 100% of lender money is safely returned. It has led Lending Works to claim that it is the safest peer-to-peer lender around.
Like Zopa, you can automatically re-lend your return or withdraw it as income, or do a mix of both.
If you want to withdraw funds there's a fee of 0.6% or £20, whichever is cheapest.
QuidCycle
Launched: November 2013
Minimum investment: £100 for a regular investment, £500 for a lump sum
Average gross return: 3.9% (one year lump sum), 5.2%(regular investment and three-year lump sum) or 6.1% (five year lump sum)
With QuidCycle you can invest over one, three or five years with a regular investment or a lump sum.
The firm describes itself as an ethically minded company; the idea is that your money is lent to borrowers who need help getting back on their feet, while they are also provided with financial advice.
Investors' money is kept in a separate bank account to the company and a provision fund which is funded by borrower fees is in place to cover default.
Lending to businesses
Funding Circle
Launched: August 2010
Minimum investment: £20
Average gross return: 7.4%
A well-established figure in the peer-to-business market, the Government-backed British Business Bank lends through Funding Circle too.
You can lend to a range of businesses automatically using the 'Autobid' function or choose which businesses you want to support by yourself. Autobid offers any available money in your Funding Circle account on business loan requests and buys parts of existing loans from other investors.
Funding Circle prides itself on being open about its fees, with a 1% annual servicing fee and 0.25% if you sell a loan on to other investors. You have the option to access your money at any time.
On the company's own advice, the best way to diversify is to invest 1% of your pot to at least 100 businesses.
ThinCats
Launched: January 2011
Minimum investment: £1,000
Average gross return: 9%
ThinCats is an online marketplace for peer-to-peer secured business loans, linking investors with "established credit-worthy businesses".
Lenders can lend on fixed rates set by the borrower, bid on loans in reverse auctions or buy existing loans on a secondary market.
Once registered members deposit money into their ThinCats account they can access the lenders' forum and bid on auction. If it's a variable auction, members pick the interest rate that they're happy with and if their bid is successful they get their chosen rate.
Multiple bids can be made at different rates for different amounts. If more than one bid is successful they will have more than one stake in that loan.
What's really interesting here is that in order for a business to get onto ThinCats, they need to have the backing of one of the site's 'mentors' who will have gone through the business plan and are willing to publicly back them.
ThinCats is a member of the P2PFA.
Assetz Capital
Launched: March 2013
Minimum investment: 1p
Average gross return: 4.25% (Quick Access Account), 7% (Great British Business Account) or 7% (Green Energy Income Account)
Assetz Capital allows people to invest in businesses, buy-to-let mortgages and even business loans to renewable-energy projects.
It offers fixed-rate auctions as well as reverse-style bidding and rather than securing funds they secure each loan to protect investors.
Selling loans or parts of loans doesn't incur a fee either which sets it apart from the competition.
Assetz Capital takes asset security on every loan so that if a borrower does default, investors should expect to recover some or all of any loss.
Lending to property investors and developers
Relendex
Launched: April 2013
Minimum investment: £500
Average gross return: 10%
With Relendex you can lend to commercial and residential property investors.
It also gives you the option to bid on fixed-rate loans in reverse auctions.
Borrowers have a rating ranging from A+ to C, with C being the riskiest.
Money is invested for one to five years with interest being paid quarterly. Capital is repaid at the end of the term, but you can access it buy selling parts of your loan at a 1% fee.
Similar to the peer-to-business loans, property can be sold to recover lost funds.
LendInvest
Launched: May 2013
Minimum investment: £100
Average gross return: 7%
Lendinvest is a site which offers residential and commercial buy-to-let mortgages or bridging loans.
Select the loan you want to invest in or you can use auto-invest to diversify your funds. You can manage your own investment criteria to suit your preferred level of risk.
Interest is paid monthly and capital is repaid at the end of the loan term, between three months and five years.
LendInvest is a member of the P2PFA.
Wellesley & Co
Launched: November 2013
Minimum investment: £10
Average gross return: 3.35% (30 day-variable), 3.75% (one year), 4.10% (18 month), 5.10% (three years), 6.32% (five year)
Wellesley & Co is a platform that offers secured bridging loans and finance for residential property development.
It takes a stake in each loan on its books, which is an unusual model.
Landbay
Launched: April 2014
Minimum investment: £100
Average gross return: 4.5% (three year fixed rate), 4% (tracker)
Landbay is a bit different in that it allows you to lend to landlords to invest in residential buy-to-let mortgages in England and Wales.
Investors have the option of picking between a fixed rate and the Bank of England Base Rate Tracker.
Your investment will automatically be spread across multiple investments to minimise the risk of default. Things move quickly with Landbay as you start earning interest within 24 hours of receipt of cleared funds.
Borrowers collect monthly repayments from their tenants, make repayments to Landbay and these are then passed on to investors.
As with many other platforms, you have the choice to re-invest your returns or withdraw them. There is the option to access your account at short notice, but you're responsible for replacing the funds.
Landbay is a member of the P2PFA.
Risks you should be aware of
All of these companies have measures in place should borrowers default, whether they be emergency funds, assets they can sell off or even using their own capital.
Though they're now regulated by the Financial Conduct Authority (FCA), peer-to-peer platforms aren't covered by the Financial Services Compensation Scheme (FSCS) so if the company goes bust, there's no guarantee you'll get your investment back.
Innovative Finance ISA
Many of the products mentioned in this article should soon, if they're not already, be offered via the new Innovative Finance ISA. This offers the opportunity to invest up to £15,240 in peer-to-peer, or a mix of peer-to-peer, stocks and shares and cash. All returns are tax free.
However, with the new tax-free Personal Savings Allowance of £1,000 of returns a year for basic-rate taxpayers and £500 for higher-rate taxpayers you could be enjoying tax-free returns from peer-to-peer right now.
Compare returns from peer-to-peer lending
