What is peer-to-peer lending?

Peer-to-peer lending websites offer a way for savers to lend directly to borrowers, cutting out the need for banks and building societies – and their charges. Because of this, savers can achieve higher returns than they might from a standard savings account, while borrowers can benefit from lower loan rates. So how does each side work?

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Peer-to-peer lending websites offer a way for savers to lend directly to borrowers, cutting out the need for banks and building societies.

Savers can achieve higher returns than they might from a standard savings account, while borrowers can benefit from lower loan rates.

So how does peer to peer lending work?

Lending via peer-to-peer lenders

If you have money and want to become a lender, first decide on the amount you are prepared to lend, and over what timeframe.

It’s possible to lend as little as £10 and there’s usually no maximum.

And you can lend for just a month, up to five years.

There are fees involved, but the returns advertised on peer-to-peer websites are usually shown with these deducted. Make sure you check.

Not all peer-to-peer websites work the same, but the amount of interest you earn will relate to:

1. The risk you want to take with your money (in other words who it’s lent to)

2. Whether you choose to fix in your rate – and for how long

3. The more general market rates, which can change daily.

It is possible to lend to small businesses through peer-to-peer websites, as well as individuals.

Unlike a traditional savings account, peer-to-peer websites are not covered by the Financial Services Compensation Scheme (FSCS), so the first £85,000 of your cash will not be protected if the website goes bust.

However, peer-to-peer lenders have their own various protection schemes in place, designed to compensate you in the event that a borrower/s defaults on their repayments.

You will need to be aged 18 to lend money through a peer-to-peer lending website.

Borrowing via peer-to-peer lenders

If you want to borrow via a peer-to-peer lender, then you can usually apply for loans from as little as £1,000 and right up to £25,000.

You can choose to repay your loan over a typical time period of between six months and five years – though longer minimum terms are sometimes imposed.

You will need to fill in an application online and will then be contacted by the lender – usually in 24 hours – with a decision as well as the interest rate you will be offered.

Bear in mind this may not be the rate you see advertised.

You will need to have a good credit history to be eligible, so if you've defaulted on debt repayments in the past or have county court judgements (CCJs) against you, any application you make is unlikely to be accepted.

You must be aged at least 21 to apply for a loan via a peer-to-peer lending website.

The peer-to-peer sector as a whole is to be regulated by the Financial Conduct Authority (FCA) from April 2014.

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