Your quick guide to understanding P2P lending
Peer-to-peer (P2P) lending has become a bit of a ‘buzzword’ in the world of investing, with the emergence of platforms to effectively provide fundinging to people in need of a loan, own a share of a property or even accelerate the provision of a deposit etc.
But what does it actually mean? A P2P lending online platform matches up people who want to lend money with people who have (excess) money, the latter of which are looking to gain interest on the money that is probably sat in their bank account earning practically 0%.
In short, these platforms operate like a marketplace, enabling lenders to be matched with borrowers. Importantly, it is not just the lenders who are benefiting from this marketplace — borrowers can get funding without going to a bank, many of whom would not be able to borrow any more money from sceptical banks, despite the likely prospect that they will be able to repay the loan. In fact, P2P lender RateSetter has not had a single borrower default to this date* and, according to the UK Peer to Peer Finance Association, the industry is creeping up to £9 billion in loans for its member platforms, amongst them notable P2P platforms Zopa, Funding Circle and Landbay.
In the UK, with interest rates at an all-time-low since the financial crash of 2008, savings accounts with traditional banks offer comparatively low rates, typically around 0.2% in today’s economic climate. Great news for borrowers, not so great news for investors or savers looking to increase their idle pile of savings.
How exactly does a P2P platform work in practice? It is quite a simple concept to grasp: an “investor” decides how much they want to invest, and for how long, the platform calculates which loans meet the criteria, and show the forecasted interest rate in return.
As with any investment, there is always a degree of risk — the higher rate of return, the riskier the borrower i.e. the more likely the borrower is to default. If, later down the line, you decide that you want to withdraw your money from the platform, your loan will need to be sold on the marketplace (for someone else to come along and invest) and then you will be able to withdraw your funds from the P2P platform. If you want to withdraw before the end of the loan term, there may be extra charges — this policy varies from platform to platform so be sure to read these..
It is always important to understand what you are investing your money into and we encourage everyone to build upon their financial knowledge. Read our other 101 guides and financial tips in our publication.
*Correct at the time of publishing
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