Are peer-to-peer firms all the same?

Updated on April 25, 2016

Peer-to-peer lenders advertise much higher savings rates than you would find on the high street – something that is holding increasing appeal for those with cash in low interest accounts. But where does your money actually go when you invest in peer-to-peer?


There’s been a real explosion in the number of peer-to-peer lending websites and so there’s a huge variety of ways to lend your cash.

We've taken a look at the major peer-to-peer firms to show what's on offer.

Funding Circle

Where does my money go?

Put your cash with Funding Circle and you will be investing with British business rather than individuals. But this won’t be just one business. Your cash will be split up across a whole range of different ones – and how many depends on the amount you lend.

As an example, investing £400 would allow you to lend across 20 businesses. There is no maximum cap on the amount you can lend and the average size of an investor portfolio is £8,000. Since 2010, more than £1.1 billion has been lent through the company.

With Funding Circle, you can actively choose which businesses you want your money to go to – so this could be anything from sole traders and SMEs to larger limited companies and limited liability partnerships. If you’re not sure, you can lend automatically using the ‘Autobid’ option.

When you have decided how much you want to lend, rather than choosing a pre-existing account with a given interest rate from the provider, you place a bid for the return you want on your cash. To help you establish this so-called ‘bid rate’ each business on Funding Circle has already been given a risk rating (from A+ to E) and the higher the risk the higher the return. If your proposed rate is agreed by one or more borrowers, you are quite literally, in business.

What interest will I earn and how will I be paid?

As explained above, the returns you earn with Funding Circle will vary, but the current estimated return is 7.2% after fees and bad debt. However that number changes frequently. This interest – and capital - will be repaid by the businesses into your account on a monthly basis.

You can choose to access your money at any time with Funding Circle by selling parts of your loans to other lenders (in other words, savers) like you.

One option is to use the Autosale tool, which will allow you to list loan parts in the Lend section of the website. Alternatively, you can sell the loan parts individually at a premium of up to 3% or a discount of up to 20%. Loan parts are listed for 14 days but there’s no guarantee that they will be purchased.

Your cash at Funding Circle is protected by its backup servicer, Link Financial Outsourcing Ltd, which – in the event of businesses defaulting – will service the loans on your behalf.

And funds that you have in your account but have not lent out are covered separately in an independent third party account which is held in Trust. In other words, Funding Circle has no right over it so it wouldn’t be frozen in the event that the company went under.

Thanks to the introduction of the Personal Savings Allowance in April 2016, basic rate taxpayers can now earn up to £1,000 a year in savings income tax-free, and higher rate taxpayers can earn £500 a year - this includes money held in peer-to-peer and current accounts.

However, eight peer-to-peer lenders have also (so far) been authorised by the Financial Conduct Authority (FCA) to offer Innovative Finance ISAs – through which all of your returns will be tax free. You can invest up to £15,240 in an ISA this tax year.

Funding Circle is awaiting approval on its Innovative Finance ISA and savers should keep checking the website for a launch date.

Lending Works

Where does my money go?

Lending Works is a peer-to-peer lending platform which matches savers to borrowers who are looking for a personal loan. Most loans are used to fund big purchases, like home improvements, buying a car or paying for a wedding so it's very much about consumers lending to consumers.

Lending Works is unusual in that it claims to be the first and only peer-to-peer lender to actually insure against borrower defaults (as well as fraud and cyber crime). It does this through the Lending Works Shield which provides protection far beyond the expected default rate.

This is actually an underwritten insurance policy as opposed to the pots of ring-fenced 'emergency' cash peer-to-peer lenders advertise, often called provision funds.

Borrowers who are approved for a personal loan at Lending Works are heavily vetted. Applicants must have an excellent credit score and very limited debts elsewhere. The average borrower's salary is around £34,000, says the website, while around 53% of successful applicants own their own home.

You can lend from as little as £10 and there's no upper limit. The average saver lends just under £8,000, according to the website.

What interest will I earn and how will I be paid?

Returns on your cash from lending via Lending Works depend on how long you are willing to part with it. You can choose to lend from one year up to five years, with returns as high as 6.1% depending on how long you lend for.

For example, if you lend for three years you can expect an annual return of 4.7%, while lending for five years can net you 6.1%.

Loan repayments are made by borrowers on a monthly basis and credited directly to your account. If you want to continue lending out money, Lending Works offers a feature called Auto Lend which, when activated, means these repayments are automatically re-lent over a selected term.

On the flipside, if you need to get your hands on your money before the agreed lending term, you can employ its 'Quick Withdraw' service which enables you to access your cash immediately providing a new lender (or 'saver') is able to take on your existing loan on the same terms.

This service comes with a charge though of 0.6% of the loan or £20, whichever is the greater. You may also be required to make up any interest rate difference if the rates on offer have increased.

As yet the website has not launched its own Innovative Finance ISA, but it says it anticipates receiving approval in the next few weeks so keep checking the site.


Where does my money go?

RateSetter is an anonymous peer-to-peer service which means you won’t know who your money is being lent to. They will all be consumers though, rather than businesses, and most will be looking to fund ‘big ticket purchases’ such as a car or a wedding, according to the website.

You won’t know how many people your money will be dished out to either. Whether it’s 100 borrowers or just one will depend on the amount you are lending and when. For example, if you want to lend £2,000 and a borrower is looking for £2,000 at the same time, it might go to one person. But in most cases it’s more.

However, the fact you could have all your eggs in one basket – and you don’t know who is holding it – shouldn’t be a problem.

First off, RateSetter only accepts ‘borrowers’ with good credit scores. They must be over 21 years old, be in receipt of a regular monthly income, have no County Court Judgments (CCJs) against them or any history of bad debt. These stringent criteria mean 85% of applicants aren't suitable for a RateSetter loan.

Savers are further protected by RateSetter’s Provision Fund – a pot of money which is funded collectively by the site’s borrowers. If you lose any of your savings – whether it’s £10 or £100,000 – due to defaults, the Provision Fund will reimburse you in full plus interest.

Currently, the Provision Fund has a coverage ratio of 138% (in other words, 38% more than the total amount lent out) so there’s more than enough to go around. Although past performance is no guarantee of the future, so far no saver has lost a penny by lending via RateSetter.

The minimum amount you can lend through RateSetter is £10 although the average is just over £21,000. There is no maximum.

What interest will I earn and how will I be paid?

In all cases interest is calculated annually and the rate you get will depend on the account you choose. The rolling market account pays an annualised rate of 3.1%, with the capital repaid on withdrawal and you can get your hands on your cash at any time without paying a penalty.

RateSetter also offers a one-year account, three-year account and five-year account, paying between 2.7% and 6.1% depending on how long you lock your cash away. However, with those deals you will pay a sell-out fee of 0.72% if you want to exit during the fixed term.

Like the rest, RateSetter is planning its own Innovative Finance ISA but has not yet launched it, so watch this space.

Wellesley & Co.

Where does my money go?

Wellesley & Co claims to be the fastest-growing peer-to-peer provider and offers a slightly different proposition.

Instead of individual consumers of businesses, the cash you stump up will be lent out to small to medium-sized (but experienced) investors in residential property.

According to Andrew Turnbull, director of the site, this helps savers in a number of ways. “Savers’ money is backed by tangible security of bricks and mortar and, because we only deal with residential property investors, the capital is easier to realise; residential homes can be sold quickly at auction without incurring much loss. The homes are all owned by investors too, rather than owner-occupied, so the legal process of getting them back is easier and the investment is not as emotive for savers.”

Savers can choose to invest as little as £10 – if they just want to see how it all works – and there is no maximum. The average deposit savers are currently making however is between £10,000 and £15,000 – and in this case, the funds will be typically split between two or three properties.

You won’t be able to see exactly which homes you have invested in, but Wellesley will provide an indication of the area they are in and the kind of loan that was required to buy them. It’s worth noting that mortgages taken on these homes will amount to a maximum 50% of the property cost.

As a saver, your funds will also be protected by Wellesley’s Provision Fund which is held in Trust by a vetted independent third party.

Even though your funds are secured against property, all borrowers will still be credit checked and will need to demonstrate they have some decent capital behind them - as well as an exit strategy if things go wrong with their investments. There is no minimum income requirement though and you can apply to borrow so long as you are 18.

What interest will I earn and how will I be paid?

With Wellesley, you can choose to invest for between one and five years, with the annual interest rising the longer you agree to lend. Annual returns range from 3.75% for the one-year deal to an impressive 5.80% for a five-year investment, although the rates are slightly lower if you choose to take the income monthly.

As a saver, you will have the option of either receiving interest on a monthly basis (if you would like an income) or wait and have all of it on the maturity of whatever loan term you select. In all cases the capital is repaid on the maturity of the term. 

You’ll only be charged extra if you want to access your cash early and the amount will then depend on how long you tied up your money for versus how prematurely you want to get your hands on it.

The company has not yet announced plans to launch its own-branded ISA.


Where does my money go?

When you invest your cash into Zopa, which is the largest of the peer-to-peer providers, your money will be divided up and lent out across at least 200 borrowers (providing you invest a minimum of £2,000 – if you invest less your money could be spread among fewer borrowers).

These borrowers could be either consumers or small businesses, such as sole traders looking to expand. You can’t choose who your money is lent to but, unlike Ratesetter, you will be able to see a profile of the borrowers and what they are doing with the funds.

Again, the fact your loan is not resting with one borrower but is split up into lots of pots, is designed to spread the risk of people defaulting. However, each borrower still undergoes rigorous credit checks and loan applicants (who must be aged at least 20) will be turned down if they have CCJs, high levels of unsecured debt or poor credit histories.

Savers will also be protected by the Zopa Safeguard fund, which was introduced in May 2013. This is a pot of money which is held in trust by a third party not-for-profit organisation – in other words, Zopa has no legal right to it.

Like Ratesetter, Zopa’s Safeguard is funded by borrowers who are charged when their loan is approved. It will pay out (both capital and interest) to savers in the event that one or more borrowers default on what they owe.

Since Safeguard was launched, all claims on loans have been paid – although this is not guaranteed. However, savers who are happy to accept a greater level of risk can access higher rates by lending to riskier borrowers and there is no Safeguard cover.

You can invest from as little as £10 in Zopa with no maximum. However, the site works best if you lend at least £2,000 as your risk-spread will be at its maximum, you can see who you have lent to and the projected interest rate on your cash will be most accurate.

What interest will I earn and how will I be paid?

Zopa offers three kinds of account. With the Zopa Access account you can earn a projected 3.5% annual return after any losses and you can still dip into your cash if you need to. The Zopa Classic account pays a projected annual return of 4.5% and is intended for savers who want to leave their money to grow. Finally, the Zopa Plus account allows you to earn a projected return of 6.5%, however, the higher return reflects a greater level of risk.

The capital on your loan and interest is then paid every month into your designated bank account, or you can choose to re-lend it.

There is no ‘easy access’ option for savers at Zopa, although if you want to access your cash before the agreed time is up then you can sell your loans off to other savers. There is no fee for doing so with the Access account but you’ll pay a 1% fee to access your money from the other accounts.

Another option is to switch off auto-lending, so if your borrowers repay early then you get the cash back early too.

Zopa is currently working to get its Innovative Finance ISA approved and hopes to launch in the ‘next few months’.

Points to note

While each provider offers its own safety net, you and your cash will fall outside the remit of the Financial Services Compensation Scheme (FSCS). This is despite the fact that from April 2014 peer-to-peer firms have fallen under the regulation of the Financial Conduct Authority (FCA). The FSCS protects the first £75,000 of funds if you were to hold them in a bank or building society.

For more information and to compare deals, visit our peer-to-peer lending channel


Peer-to-peer lending is regulated by the Financial Conduct Authority, but your money is NOT protected by the Financial Services Compensation Scheme. There is a risk you may lose some or all of your initial investment.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.


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