Peer-to-peer lending matches up savers who are willing to lend with borrowers - either individuals or small businesses. Interest rates can be more attractive than those offered by banks, but the high interest rates come with added risk, most notably the fact you might struggle to get your money back if the borrowers you've lent your money to fail to repay. Peer-to-peer lending platforms aren't covered by the Financial Services Compensation Scheme (FSCS) which guarantees your savings with banks and building societies up to the value of £85,000.
- Peer-to-peer lending platforms cut out the middleman and the overheads of a traditional bank and often offer more favourable rates than in a savings account or other investments. The platforms make their money by bringing borrowers and lenders together.
- By being connected directly to someone who wants to borrow, the most immediate risk to the peer-to-peer investor's capital is if a borrower fails to repay the loan. If a lender defaults with a bank, the bank absorbs the loss. The risk of default is managed differently by each peer-to-peer site. Some offer compensation funds whereas others takes a different approach and claim to offer higher returns to compensate for the risk of default.
- Returns on peer-to-peer lending are currently taxable as income. Therefore, the peer-to-peer investor will need to inform HMRC how much interest they earn at the end of each year.
- However, a new type of Isa called the 'Innovative Finance Isa' will be introduced from 6 April 2016 for peer-to-peer lending. The peer-to-peer investor may be able to set up an Isa with an individual platform so that any interest paid by borrowers is tax-free.
- The borrower on most peer-to-peer lending platforms will not only be credit-checked by a credit reference agency, but they will also have to pass peer-to-peer platform credit-worthiness tests in order to qualify for a loan
Unbolted takes a completely different approach to peer-to-peer lending