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Peer to peer lending guide

Are you searching for the best rate on your cash? One option is to sidestep the banks, and consider a peer-to-peer (P2P) lender.

This way, you lend your money to borrowers via online companies such as Zopa, Ratesetter and Funding Circle, in return for a juicy rate on your savings. These websites can be considered a kind of broker, uniting lenders and borrowers in search of a good deal.

Here we explain how P2P lending works, and the pros and cons.

What is peer-to-peer lending?

Put simply, you lend cash to strangers in return for some interest. So savers can hunt for a good return from wannabe borrowers on the sites. Meanwhile, borrowers can put up a plea for some cash and hope someone comes along who is willing to lend it to them.

Using these sites you control how much you lend, and who to, along with how much interest you want in return. However, while you can set the interest rate, you will find a fee from the P2P lender is deducted from your return.

There will also be a fee to pay, so check the terms carefully before signing up to be a lender or borrower.

What are the pros?

You can often get a far higher rate through peer-to-leer lending that you can through a bank or building society. So if you're fed up with paltry interest rates, this route to greater returns may appeal.

These sites can also set fees relatively low. In comparison banks have greater costs to meet through their models, so they can't offer such attractive rates. The concept for P2P lending is that without regulation, administration and the branch network of banks, these lenders can offer higher rates.

What are the cons?

However, unlike banks, there is no guarantee that you will get your money back. While peer-to-peer lenders will check that borrowers can afford to repay your cash, and often split it among many borrowers to spread the risk, they can't offer a cast-iron guarantee that you will get every penny back.

P2P websites are not regulated by the Financial Conduct Authority (FCA). This means that you are not protected by the Financial Services Compensation Scheme. At present, this guarantees your savings up to £85,000 if a provider goes bust.

There will also be a fee to pay, so check the terms carefully before signing up to be a lender or borrower.

How do P2P lenders check their users?

If you decide to be a lender you will need to have your details verified so that they meet money laundering rules. Borrowers are credit-checked using a credit reference agency. Each peer-to-peer site will also have its own unique test to decipher if they are happy for you to sign up.

Can I get my money back early if I need it?

Check the terms if you think you might need your money back before the end of the loan term. While some peer-to-peer lenders will allow you to withdraw money early, you will face a fee for doing so. As with any finance agreement, make sure to read the fine print.

Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.


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