In its current form, peer-to-peer (P2P) lending has existed in the UK for 15 years.
By providing a platform where people can lend to (and borrow from) each other directly (or semi-directly), it is intended to eliminate the middleman within the property finance industry.
Is P2P lending secure, though? What are your chances of winning or losing and what are the chances that you won't get your money back at the right return?
In This Article
What is Peer To Peer Lending?
Peer-to-peer lending, commonly known as P2P lending, is a type of lending where individuals can directly lend money to borrowers without involving any banks.
This method of lending enables lenders to earn a higher interest rate, while borrowers can benefit from loans at lower interest rates due to the lower overhead costs of P2P platforms.
P2P lending platforms don't entirely eliminate the need for intermediaries. They play a significant role in scrutinizing borrowers, monitoring repayments, and overseeing transactions. In return, they receive a portion of the funds as compensation.
Despite this, P2P lending is usually more beneficial for both lenders and borrowers financially, despite being riskier for the lender compared to traditional bank accounts.
How Does Peer-To-Peer Lending Work?
When it comes to P2P lending, there are various platforms available to select from. As a lender, you will need to choose a platform and deposit funds through a direct transfer or debit card.
You will then determine a fixed interest rate and the duration of the loan period, usually ranging from one to five years.
Upon the completion of the term and repayment of the loan amount along with interest, you will be able to withdraw your money or reinvest the profits to increase your earnings.
When it comes to lending money through online platforms, some websites allow you to handpick the borrowers you want to lend to, but it's some instances you may be able to distribute your funds across multiple borrowers to mitigate risks and diversify your portfolio.
These platforms offer various investment options with different interest rates, risks, and withdrawal terms.
For instance, you may invest £5,000 for two years at a fixed interest rate of 5%, with a 0.5% fee on the total amount if you need to withdraw your cash early.
If you plan to lend money, it's wise to consult with a professional independent financial advisor to understand the options thoroughly.
Is Property Peer- To- Peer (P2P) Lending Safe?
P2P lending, also known as investing in loans, involves taking a financial risk like any other investment.
Unlike banks or building societies, P2P lenders are not covered by the Financial Services Compensation Scheme. In the event of platform bankruptcy, you may lose your money entirely, although as a creditor, you may receive some compensation through the liquidation process.
In the event that the borrower fails to repay the loan, the lender is not safeguarded by the government and faces the possibility of losing their investment.
While many large P2P platforms have reserve funds to cover such situations and reimburse lenders, these emergency funds are limited and may be depleted during exceptional circumstances like a financial crisis or a run on the platform.
As a result, lenders may lose their expected returns or even their entire investment. Although the chances of this happening are not very high, they are not non-existent
What Are The Other Risks Of Peer To Peer Lending?
P2P lending enables you to earn income by setting or accepting an interest rate. The interest rates usually range from 4% to as high as 9%, depending on your risk tolerance.
However, there are higher interest rates available, but this entails a greater risk of losing your investment.
Apart from the risk of losing your money, there are three other significant risks associated with P2P lending.
Unable To Access Your Funds When You Want
Various P2P lending platforms provide the facility of early money withdrawal, but there could be some limitations or costs associated with it.
It is advisable to thoroughly read and understand the terms and conditions mentioned in the agreement before opting for any such service.
Risk Of Not Getting Your Expected Return
When a borrower repays a loan earlier or later than expected, it can result in lower profits than initially projected.
Additionally, interest on the invested money only accrues after it has been lent out to borrowers, rather than while it remains in the P2P account.
Depending on the investment amount, it may take several days or even longer to find borrowers and fully allocate the funds.
Platforms Going Out Of Business
The collapse of UK-based P2P provider The House Crowd serves as evidence that P2P providers can fail.
As P2P platforms are still fairly new, they have yet to be tested by major economic downturns or market disruptions.
What Are The Benefits Of Peer To Peer Lending
P2P lending has the potential to yield high returns for those who are willing to take on the associated risks.
The administrative and debt collection tasks are largely managed by the lending platforms, making it a relatively low-effort investment option. However, it's important to note that the income generated through P2P lending is typically subject to taxation.
Despite this, the personal savings allowance enables most lenders to avoid paying taxes on their earnings, with basic rate taxpayers being able to earn up to £1,000 of tax-free interest every year (and £500 for higher rate taxpayers).
Which Companies Use Peer To Peer Lending In the Property Market?
TAB Market enables new and existing investors to access a range of products at varying interest rates. Their products provide investors an opportunity to invest in UK property and benefit even if they don’t have the usual means or know-how
Respected in the commercial property industry, Proplend is a financial technology platform that enables individual and institutional investors to earn attractive rates of risk-adjusted returns by lending money directly to commercial property investors.
Blend is founded on the belief that development finance needs a new type of lender – one that isn't slowed down by the same barriers as traditional lenders and can genuinely put developers first. By bringing together expertise in property, finance, and technology they have created a great platform.
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties.
Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract. Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.