Peer to peer lending is a network of investors ready and willing to lend their cash through an online platform that manages their money.
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The platform takes on marketing the service, sourcing customers and underwriting loans.
The service is still in its infancy and a limited number of platforms are established with a track record of low risk lending.
Here, you can find details of the three most popular peer to peer lending platforms and what you need to do once you have registered as a potential lender.
The three sites that dominate the UK peer to peer lending market are:
Zopa and Ratesetter lend to individuals, while Funding Circle specialises in financing small businesses.
Zopa is the oldest peer to peer lender operates in a similar way to a fixed rate savings account.
Investors pay in an initial seed amount to start their account and then top it up every month.
The minimum investment is £10. Lenders earn interest monthly.
Zopa crowdlends to minimise risk. A private lender’s money is not limited to a single transaction but is spread across several loans.
The money is kept on deposit for 1236 or 60 months.
Early access is available to investors, but a 1% fee on the total amount taken out before the end of the term is levied by the platform.
Zopa has lent £581 million and has more than 50,000 active private lenders participating in the platform.
Ratesetter operates like Zopa, but as the name suggests, lets private lenders take more control over their deposits.
Instead of plumping for a fixed rate, lenders can choose to set a lower or higher interest rate and adjust the lending term to suit their financial strategy. This is particularly useful for lenders on a fixed income who need a quick earnings boost.
Custom loan management comes with slightly lower interest rates than those offered by rival platforms to pay for the optional extra.
Funds are crowdlended, so lenders do not have their money tied up in a single, risky deal.
Early access to their money is available to lenders, providing funds are available from other private lenders to take their place.
Ratesetter borrowers have taken out £300 million and the platform has around 13,000 active investors.
Funding Circle lends to businesses.
Instead of setting rates, lenders pitch a loan amount, term and interest rate and a borrower can then pick and choose the deal they want.
Commercial lending comes with more risk than lending to individuals, so Funding Circle is not a good option for unsophisticated or first-time investors. Its better they cut their teeth with Zopa or Ratesetter first.
Funding Circle says average returns are 6.1% after fees and bad debts are taken into account.
The platform has lent £320 million and has 30,000 investors.
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