Peer-to-peer has become big business in recent years. After almost a decade of rock-bottom interest rates, savers have been extra motivated to find a more fruitful home for their cash.
But how does peer-to-peer lending work, who is it good for – and where does Fundshare come in?
Find out everything you need to know with our no-nonsense Q&A.
Q. What is peer-to-peer lending?
A. As it says on the tin, peer-to-peer lending is when two parties – in this case, investors and borrowers – are brought together via a special online platform. Usually either party would have to go to a bank or building society but, without their overheads and charges, peer-to-peer borrowers can get cheaper loans while investors are able to get much better returns on their cash.
Q. Where does my cash go?
A. That depends on the provider. Your cash could be lent out to consumers in the form of personal loans – perhaps to pay for a new car, home improvements or wedding. Equally it could be lent to start-up businesses, residential or commercial property investors, or even in funds that invest in green energy. As the peer-to-peer industry has grown, so has the choice of where you can invest your cash. Fundshare’s comparison tool can be useful because it allows you to start your search with where you want your money to go.
Q. Do I lend to just one borrower?
A. Not usually. Most peer-to-peer providers will take your money and divide it up between tens or even hundreds of separate loans. That way, if one or even more borrowers default, your risk is thinly spread. But losses of this kind, known as ‘bad debts’, tend to be rare. In the first instance, peer-to-peer providers can be very fussy about who they lend to, and lenders have to undergone rigorous credit checks. The APRs (annual percentage rates) you see advertised also usually factor in bad debts – and they are still considerably higher than the savings rates you’d find on the high street.
Q. Can I get access to my money?
A. Just like with a bank or building society, you can choose to retain access to your money with a variable rate peer-to-peer account, or lock it up in a fixed rate bond. Flexible accounts may still require 30 days’ notice to access your funds, so make sure you check. Terms on fixed rate investments within peer-to-peer start from around 12 months and extend to up to five years. As a rule, the longer you tie up your cash, the higher returns you can get. You can often access your cash before the end of the stated fixed term – and even without charge – but on the condition the provider can match another lender with your loan. And, depending on the circumstances, this could take some time.
Q. What about tax?
A. Standard savings accounts at a bank or building society are automatically taxed at the basic rate of 20%. But returns from peer-to-peer are paid gross of tax, so you will have to declare the income in your tax return. It was announced in the 2014 Budget that savers will soon be able to include peer-to-peer lending within a tax-free ISA allowance – but we are still waiting on the details.
Q. Is the peer-to-peer industry regulated?
A. Since April 2014 peer-to-peer has been regulated by city watchdog the Financial Conduct Authority (FCA). However, it’s important to realise that your money will NOT be protected under the Financial Services Compensation Scheme (FSCS). This is a guarantee that pays out the first £75,000 of your savings (per individual, per banking institution) should a bank or building society goes bust. There is also an industry trade body, the P2P Finance Association which represents over 90% of providers.
Q. How much can I invest?
A. You can invest from as little as £1 if you just want to dip a toe in the water. There is generally no upper limit, although always bear in mind your cash won’t be covered by the FSCS.
Q. How is my cash protected?
A. Peer-to-peer lenders have safety nets in the form of ‘provision funds’ which are usually held in Trust by independent third parties. The FCA has ruled these funds must now hold a capital buffer of at least £20,000 (rising to £50,000 from April, 2017). However, many of the more established peer-to-providers already carry much more than that – at around two or three times the total loans made. It’s always worth checking directly with the provider however, exactly what their ‘coverage ratio’ is and how they would refund your cash if they were to cease trading.
Q. How can Fundshare help?
A. As an independent comparison website for peer-to-peer, Fundshare does the hard work for you when it comes to choosing the right provider. Simply tell us how much you want to lend, over how long and what you want to invest in – and we’ll search the market and try to find you the best deals for you.
Our straightforward guide to peer to peer investing
Download the guide and take it with you wherever you go.