With interest rates favourable to lenders and borrowers, peer-to-peer (P2P) lending has become massively popular in the last few years – and challenged the monopoly of traditional banks. But P2P can be much riskier than a savings account. If you’re thinking of dipping your toe in, it’s essential to do your research first.

What is peer-to-peer lending?

The idea is simple: you lend your money to individuals or businesses using a P2P platform as the middleman. Also known as online financial ‘matchmaking’, it is attractive to both lenders and borrowers.1

The person borrowing gets a lower interest rate, whilst the person lending typically receives a higher interest rate than a savings account, with the sites themselves profiting via a fee. Thankfully, there’s no swiping involved – borrowers are handpicked following credit checks and rated according to risk.

Is it for me?

P2P might be for you if you’re looking to maximise your savings in order to meet medium-term goals, like a deposit for a house or a new car.

The experience of P2P lending is different from saving in a bank account and investing in stocks and shares. It’s much more tangible, as you can see and choose who you loan your money to – for example, a high-rise property development or a new project by a start-up. This makes it fun and engaging, but more hands on than long-term saving and investing – and of course comes with higher risk and volatility.

How risky is it?

When it comes to P2P, you’re taking on a much greater level of risk than if you simply deposited money in a bank account.

By lending your money to individuals or businesses, you run the risk of a borrower defaulting on their repayments and leaving you out of pocket. Unlike well-known banks, P2P platforms are not covered by the Financial Services Compensation Scheme, which means that if the platform goes bust you may lose your money. Take steps to keep your investment risk down by diversifying across various P2P platforms and try to avoid having all of your money in P2P.

The P2P market has been going strong for the past 10 years, which has been a period of relative stability for wider financial markets. Prior to Brexit and the coronavirus crisis, the sector had yet to experience a downturn – in which a large number of borrowers default on their loans. Given the recent volatility, though, any potential impacts on the P2P sector remain uncertain. Peer-to-peer is a relatively new industry – many firms have never had to ride out a significant downturn, and we don’t know how they’ll cope when they do.2

The bottom line

P2P can offer a higher return on your investment than a traditional savings account, but is higher in risk. In any case, if you do decide to give P2P a go, you should check the platform is regulated by the Financial Conduct Authority (search on the register) – and is a member of the P2P Finance Association.

With interest rates favourable to lenders and borrowers, peer-to-peer (P2P) lending has become massively popular in the last few years – and challenged the monopoly of traditional banks. But P2P can be much riskier than a savings account. If you’re thinking of dipping your toe in, it’s essential to do your research first.

What is peer-to-peer lending?

The idea is simple: you lend your money to individuals or businesses using a P2P platform as the middleman. Also known as online financial ‘matchmaking’, it is attractive to both lenders and borrowers.1

The person borrowing gets a lower interest rate, whilst the person lending typically receives a higher interest rate than a savings account, with the sites themselves profiting via a fee. Thankfully, there’s no swiping involved – borrowers are handpicked following credit checks and rated according to risk.

Is it for me?

P2P might be for you if you’re looking to maximise your savings in order to meet medium-term goals, like a deposit for a house or a new car.

The experience of P2P lending is different from saving in a bank account and investing in stocks and shares. It’s much more tangible, as you can see and choose who you loan your money to – for example, a high-rise property development or a new project by a start-up. This makes it fun and engaging, but more hands on than long-term saving and investing – and of course comes with higher risk and volatility.

How risky is it?

When it comes to P2P, you’re taking on a much greater level of risk than if you simply deposited money in a bank account.

By lending your money to individuals or businesses, you run the risk of a borrower defaulting on their repayments and leaving you out of pocket. Unlike well-known banks, P2P platforms are not covered by the Financial Services Compensation Scheme, which means that if the platform goes bust you may lose your money. Take steps to keep your investment risk down by diversifying across various P2P platforms and try to avoid having all of your money in P2P.

The P2P market has been going strong for the past 10 years, which has been a period of relative stability for wider financial markets. Prior to Brexit and the coronavirus crisis, the sector had yet to experience a downturn – in which a large number of borrowers default on their loans. Given the recent volatility, though, any potential impacts on the P2P sector remain uncertain. Peer-to-peer is a relatively new industry – many firms have never had to ride out a significant downturn, and we don’t know how they’ll cope when they do.2

The bottom line

P2P can offer a higher return on your investment than a traditional savings account, but is higher in risk. In any case, if you do decide to give P2P a go, you should check the platform is regulated by the Financial Conduct Authority (search on the register) – and is a member of the P2P Finance Association.

With interest rates favourable to lenders and borrowers, peer-to-peer (P2P) lending has become massively popular in the last few years – and challenged the monopoly of traditional banks. But P2P can be much riskier than a savings account. If you’re thinking of dipping your toe in, it’s essential to do your research first.

What is peer-to-peer lending?

The idea is simple: you lend your money to individuals or businesses using a P2P platform as the middleman. Also known as online financial ‘matchmaking’, it is attractive to both lenders and borrowers.1

The person borrowing gets a lower interest rate, whilst the person lending typically receives a higher interest rate than a savings account, with the sites themselves profiting via a fee. Thankfully, there’s no swiping involved – borrowers are handpicked following credit checks and rated according to risk.

Is it for me?

P2P might be for you if you’re looking to maximise your savings in order to meet medium-term goals, like a deposit for a house or a new car.

The experience of P2P lending is different from saving in a bank account and investing in stocks and shares. It’s much more tangible, as you can see and choose who you loan your money to – for example, a high-rise property development or a new project by a start-up. This makes it fun and engaging, but more hands on than long-term saving and investing – and of course comes with higher risk and volatility.

How risky is it?

When it comes to P2P, you’re taking on a much greater level of risk than if you simply deposited money in a bank account.

By lending your money to individuals or businesses, you run the risk of a borrower defaulting on their repayments and leaving you out of pocket. Unlike well-known banks, P2P platforms are not covered by the Financial Services Compensation Scheme, which means that if the platform goes bust you may lose your money. Take steps to keep your investment risk down by diversifying across various P2P platforms and try to avoid having all of your money in P2P.

The P2P market has been going strong for the past 10 years, which has been a period of relative stability for wider financial markets. Prior to Brexit and the coronavirus crisis, the sector had yet to experience a downturn – in which a large number of borrowers default on their loans. Given the recent volatility, though, any potential impacts on the P2P sector remain uncertain. Peer-to-peer is a relatively new industry – many firms have never had to ride out a significant downturn, and we don’t know how they’ll cope when they do.2

The bottom line

P2P can offer a higher return on your investment than a traditional savings account, but is higher in risk. In any case, if you do decide to give P2P a go, you should check the platform is regulated by the Financial Conduct Authority (search on the register) – and is a member of the P2P Finance Association.

References

1. MoneySavingExpert.Com, ‘Peer-to-Peer Lending’, February 2019
2. MoneySavingExpert.Com, ‘Peer-to-Peer Lending’, February 2019

References

1. MoneySavingExpert.Com, ‘Peer-to-Peer Lending’, February 2019
2. MoneySavingExpert.Com, ‘Peer-to-Peer Lending’, February 2019

References

1. MoneySavingExpert.Com, ‘Peer-to-Peer Lending’, February 2019
2. MoneySavingExpert.Com, ‘Peer-to-Peer Lending’, February 2019

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