Peer-to-peer: what return will you get on your money?
There’s a growing range of peer-to-peer platforms to invest with these days. But where is your money going? And what return will you get?
Peer-to-peer websites have grown in popularity over the last few years.
These online platforms act as financial matchmakers, connecting savers willing to lend directly to borrowers in need of credit. And as there is no middle man – in the shape of banks or building societies, who would take a fat cut – each side tend to get a better deal.
Borrowers include individuals, small- and medium-sized businesses, and property investors/developers.
This sector has received two major boosts recently. Firstly, peer-to-peer lending is now regulated by the Financial Conduct Authority (FCA). What's more you'll soon be able to place peer-to-peer investments in an ISA wrapper, boosting the returns by protecting them from tax.
With better regulation and tax-free benefits on the horizon it looks like the peer-to-peer lending scene may be set to explode. So if you don’t already know about the major players here’s a crash course.
We've divided the different companies up based on whether they work with individuals, businesses or property investors/developers.
Peer-to-peer companies facilitating loans to individuals
Zopa
Launched: March 2005
Min investment: £10
Average gross return: 5.1% (five-year annualised return) or 4% (three-year annualised return) - after fees and bad debts
Zopa, now approaching its tenth year, is one of the oldest and biggest peer-to-peer platforms around.
To date, it has helped lend £722 million to borrowers, earning lenders £45 million in interest.
Zopa’s platform works by automatically lending money invested in chunks to different borrowers over a three- or five-year term.
This helps to spread risk and reduce the impact from arrears or defaults. But there’s also a Safeguard Fund, currently worth over £6.8 million, which will step in if a borrower is having trouble making payments. So far the fund has helped every lender get back 100% of what they put in.
Repayments from borrowers are paid monthly and are made up of interest and capital. The returns can be relent automatically or withdrawn as income.
You can access your money before the end of the term using the early access feature. This tool allows you to sell your loan to other investors. However, it attracts a 1% fee.
Zopa is a founding member of the Peer-to-Peer Finance Association (P2PFA).
RateSetter
Launched: October 2010
Min investment: £10
Average gross return: 2.7% (monthly access), 4% (one-year income), 4.7% (three-year income) or 6% (five-year income) - latest matched rates after fees and bad debts
RateSetter is another big player in the peer-to-peer market.
As a lender, you fund your account, decide how long you want to lend for and set the rate you are willing to lend at. Your request is then matched with a borrower.
Repayments are made up of capital and interest. RateSetter allows you to withdraw or reinvest both, or just the capital.
If you need access to some or all of your money before the end of the term you can use the Sell Out feature, which will find another lender to take your place.
RateSetter was the first platform to introduce a fund that protects lenders from defaults and arrears. The Provision Fund has ensured no lender has ever lost a penny.
The firm is another founding member of the P2PFA.
Lending Works
Launched: January 2014
Min investment: £10
Fixed gross return: 5% (up to three years) or 6% (up to five years) - after fees and bad debts
Lending Works is a relatively new player in the peer-to-peer market, but claims it’s the safest around.
The firm says it differs because it offers three layers of protection for lenders, made up of strict checks on borrowers, ring-fencing money invested and its Lending Works Shield.
The Lending Works Shield has a reserve fund protecting borrowers from defaults as well as a unique insurance policy to cover the impact of an extraordinary event like a major economic downturn, fraud and cybercrime. The shield means lenders are protected even if the defaults of borrowers rises to 10%.
Lending Works, like most peer-to-peer platforms, usually offers projected average rates, which will vary according to supply and demand. However, for a limited period its holding a Rate Lock offering lenders a fixed return of 5% on money lent for up to three years or 6% on money lent for up to five years.
You can get the fixed rates on money invested from now until Sunday 1st March 2015.
Should you need access to your capital before the end of the term you can use the Quick Withdraw facility for a 0.6% fee.
Lending Works is a member of the P2PFA.
Peer-to-peer companies facilitating loans to businesses
Funding Circle
Launched: August 2010
Min investment: £20
Average gross return: 7.1% – after fees and bad debts
Funding Circle allows you to lend to UK businesses.
The website works as a marketplace where lenders can bid in a reverse auction on loan requests. Those with the lowest interest rates will all get a stake in the loan.
You can choose to take part in auctions manually, using an auto bid tool or take a look at the secondary market.
If you want to release your investment you can do so by selling it to another investor, though this attracts a 0.25% fee.
Funding Circle also charges a 1% fee on all lending, which you pay each time a business makes a repayment.
A key attraction with Funding Circle is that you can view the type of business your cash will go to, look at their accounts and ask what the money will be used for.
However, there is no fund to step in if a borrower defaults, so there is some risk to your money unless the loan is secured or comes with a personal guarantee. Funding Circle, like other peer-to-peer platforms, encourages investors to spread the risk by lending to lots of different businesses.
The firm is another founding member of the P2PFA.
Thin Cats
Launched: January 2011
Min investment: £1,000
Average gross return: 9% – after fees and bad debts
Thin Cats is an online marketplace for peer-to-peer secured business loans, linking investors with "established credit-worthy businesses".
Lenders can lend on fixed rates set by the borrower, bid on loans in reverse auctions or buy existing loans on the secondary market.
To release capital you can sell loan parts but this attracts a £25 or 1% charge on the amount outstanding (whichever is higher), capped at £75.
Borrowers have to offer security for every loan, which can be called in if a business defaults.
Thin Cats is also a member of the P2PFA.
Rebuilding Society
Launched: September 2012
Min investment: £10
Average gross return: 16.2% – before bad debt
Rebuilding Society is another peer-to-peer platform which facilitates lending to small businesses.
Lenders are given suggestions of businesses that might suit, but can also pick themselves with a wealth of information about each company available, including at least two years' accounts, performance figures and a risk banding from A+ to C (with A+ representing the lowest risk).
There are no direct fees for lending, but there is a fee to pay if you want to sell your loan of 0.5% of the outstanding capital.
There isn’t a fund to act as a safety net but some loans will be secured, so if a borrower defaults losses can be recovered.
Funding Knight
Launched: January 2013
Min investment: £25
Average return: 10.7% – before bad debt
Funding Knight is another platform that allows individuals to lend to small UK businesses.
Each business must have at least two years’ company accounts on record and are given a Shield Rating to indicate how risky they are.
Like Funding Circle, Thin Cats and Rebuilding Society you can use a reverse style auction to bid on loans or use the auto bid tool. Alternatively you can take on existing loans from other investors via the Loan Exchange.
Again you are encouraged to split your lending across businesses to spread risk.
Investors don't have to pay a fee unless they sell loan parts on to release their capital where there is a 1% charge.
Funding Empire
Launched: January 2013
Min investment: £20
Average return: 12.11% – before bad debt
Funding Empire is a little different to the main players in peer-to-peer lending for businesses as it allows lenders to invest in start-ups and sole traders as well as more established firms.
All are thoroughly checked and newer businesses are offered coaching to ensure they succeed. Each business is given a risk rating of A (very low risk) to C (average risk). Start-ups are given an ‘N’ for new business to ensure investors know what they are dealing with.
Everything else mirrors other platforms that help businesses: reverse auctions, lending to a range of different businesses to reduce risk and the ability to sell on loan parts (subject to a 0.5% fee).
Assetz Capital
Launched: March 2013
Min investment: £20
Average gross return: 9% – before bad debt
Assetz Capital is a peer-to-peer platform that allows people to invest in businesses as well as property loans and buy-to-let mortgages.
It offers fixed rate auctions as well as reverse-style bidding. Each loan is secured to protect investors rather than a pot of money being built up.
The rest of the operation follows the same patterns as other platforms. Investors are encouraged to lend to different businesses and have the ability to sell on loan parts to other investors, but unlike other platforms this doesn't attract a fee.
Peer-to-peer companies facilitating loans to property investors and developers
LendInvest
Launched: April 2013
Min investment: £1,000
Average return: 6.65% – after bad debt
LendInvest is a peer-to-peer platform for property investors looking for residential and commercial buy-to-let mortgages and bridging loans.
Like Assetz Capital, LendInvest secures loans against property so there is no reserve fund needed to protect investors.
You can invest in whole loans or parts to spread risk, but you’ll need a minimum of £1,000 to get started.
Interest is paid monthly and the capital is repaid at the end of the term of the loan which can be between three months and five years. You can get your capital out by selling your loan to another investor though LendInvest.
The firm is also part of the P2PFA.
Relendex
Launched: April 2013
Min investment: £500
Average gross return: 10% – after fees and bad debts
Relendex is another peer-to-peer platform that allows you to lend to commercial and residential property investors looking for a loan.
You can bid on loans in a reverse auction or try a fixed rate loan instead. Loans are given a risk rating A+ to C, with A+ representing the lowest risk to your money. However, the risk of default is low as loans are secured against income-producing commercial property, which can be sold to recover losses.
Money usually stays invested for one to five years and you get interest paid each quarter. Your capital is repaid at the end of the loan, but if you need to access to it you can sell loan parts in the marketplace for a 1% fee.
Wellesley & Co
Launched: November 2013
Min investment: £10
Average gross return: 2.92% (one-month variable), 3% (one-year fixed rate), 4.25% (three-year fixed rate) and 6% (five-year fixed rate) - after bad debt
Wellesley & Co is a peer-to-peer platform that offers secured bridging loans and finance for residential property development.
It works slightly differently to other peer-to-peer websites as the company will lend its own money to borrowers first and then offer these ready-made loans onto investors.
This process means you get a fixed rate of interest and your money isn’t left idle.
As well as securing loans there is another layer of protection from a provision fund. Wellesley & Co’s fund operates as a separate company. Directors will decide what to pay any lender that experiences losses, but so far no borrower has defaulted.
Landbay
Launched: April 2014
Min investment: £100
Average gross return: 4.4% (three-year fixed rate) 3.5% (five-year base rate tracker)
Landbay is a peer-to-peer platform that allows savers to lend to landlords to invest in residential buy-to-let mortgages in England and Wales.
Investors can pick from the three-year fixed rate or the Bank of England base rate tracker.
The platform will automatically spread your investment across multiple properties in order to reduce risk from default or market down turn.
Lending is secured on tenanted properties with a maximum loan-to-value of 72% and rental will be at least 125% of the mortgage repayment.
Landbay also has a Protection Fund that covers both the Fixed and Tracker Rate Products to protect investors further.
Lenders can redeem loans parts at any time providing the loan can be reallocated to other lenders and the platform does this fee-free.
Landbay is also part of the P2PFA.
Health warning
While peer-to-peer platforms offer a great alternative to earn a better return on your money, they don’t come with the same protection that banks and building societies offer.
Any investments you make won’t be covered by the Financial Services Compensation Scheme, which protects up to £85,000 of UK deposits per individual per institution.
However, as mentioned in the individual profiles, many companies have provision and other funds to cover any potential losses.
And each and every company encourages you to spread your risk by investing small amounts in lots of different loans. That way if a borrower does default, the impact is minimal.
The other thing to bear in mind is your money might not be lent out straight away and so no interest will be paid in this time.
And remember that returns aren’t taxed at source, so you will need to fill in a self-assessment tax return each year to pay what you owe.
More on savings:
Beginner's guide to stocks & shares ISAs
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