If you’ve never lent or borrowed through a peer-to-peer lending website before, but are considering doing so, it’s important to get to grips with a few basics first.
Here, we explain what you need to know about peer-to-peer lending before you sign up as a lender or borrower:
How does peer-to-peer lending work?
Peer-to-peer lending websites match people looking for loans with savers prepared to lend money. As there’s no middleman involved, such as a bank or building society, lenders can generally achieve higher returns than those offered by conventional savings accounts, while borrowers benefit from lower loan rates. Returns may depend on how long investors wish to lend for and whether they want to receive an income every month, or if they want to re-lend their money and get a higher rate.
Do I need a large lump sum to get involved?
No. In fact most peer-to-peer lenders only require a minimum initial investment of £10. There’s usually no maximum amount you can lend.
Can anyone borrow through a peer-to-peer website?
No, peer-to-peer lending sites vet borrowers very carefully before any loan is offered, so they will have to undergo credit checks in the same way they would if they apply for a loan elsewhere. That means anyone who’s defaulted on debt repayments in the past, has county court judgements (CCJs) against them, or who’s ever been made bankrupt, is likely refused by peer-to-peer lenders. This reduces the risk of debts not being repaid. Most peer-to-peer lenders also spread your money across several different borrowers, so that if one person fails to make repayments on time, the overall impact is reduced.
Do I have to pay tax on my returns?
Yes you do. Returns from peer-to-peer lending are paid without tax deducted, so it’s up to you to let the HM Revenue & Customs know that you have tax to pay. You should receive an annual income statement from your peer-to-peer lending website so you can see the total amount of interest you’ve received over the past year. You must include this information on your self-assessment tax return.
If you don’t fill in a tax return, you should let your local Tax Office know about your interest. They should be able to adjust your tax code to collect any tax due on the interest you have earned.
In April 2016 we saw the launch of the IFISA, which enabled investors to take advantage of tax free potential returns. Returns from ISAs are free of both income tax and capital gains tax. Read more about peer-to-peer lending and ISAs here.
Is my money safe?
There are risks involved in peer-to-peer lending, so it won’t suit everyone. Peer-to-peer lending isn’t covered by the Financial Services Compensation Scheme (FSCS), which will pay up to £75,000 per person, per financial institution if that institution goes bust. However, it is regulated by the Financial Conduct Authority. This means all peer-to-peer lenders must be clear about the risks involved, and have plans in place to protect lenders in case anything goes wrong.
Most peer-to-peer lenders also have their own safeguard or provision funds in place to compensate lenders in the even a borrower defaults on their loans, which further reduces risks.
To find out more about some of the safeguards which are in place, read our article ‘How safe is peer-to-peer lending?’