Your most important questions answered
Please see this page for a proper answer to that.
Generally, yes, provided lending isn't your main business.
Take a look at our guide page to see which P2P lending websites we asked about this and what the conditions are.
Here's the page: Can Your Business Lend Through P2P?
We at 4thWay are professional risk modellers, fund managers, experienced investors and others who take our responsibilities to you, our website users and fellow investors, very seriously. You are number one. As savers and investors who use comparison sites ourselves, we also know it is very important that you know you can trust us to be fully candid, open and impartial. And you can!
We list P2P lending companies in our comparison table in precisely the right order and always candidly explain the full pros and cons. And we're democratically governed by our users to ensure our trustworthiness.
Read more about all this in How We Earn Money Fairly With Your Help.
4thWay® PLUS Ratings reflect our conservative estimates of how long it might take to recover all your losses during a 1-in-100-year severe recession/property crash, which in some cases could involve six times more loans going bad and (for property loans) a property-price crash of 55%.
Lending results during a very severe recession/property crash:
Five PLUSes: no losses after interest earned, or losses recovered within 0-2 years
Four PLUSes: losses recovered inside 3 years
Three PLUSes: losses recovered inside 4 years
Two PLUSes: losses recovered inside 5 years
One PLUS: losses recovered inside 6 years
Unrated: losses recovered in over 6 years or no full recovery expected, not enough information to provide a rating
IMPORTANT: 4thWay® PLUS Ratings assume that you spread your money across lots of loans, using multiple peer-to-peer lending platforms to do so if necessary. They are are impartial, mathematical and conservative, and they are indicators, not guarantees or promises, so please don’t use them without supplementary research.
Learn more about the 4thWay® PLUS Ratings. Also, click on a PLUS Rating in 4thWay's comparison table to get more information about that particular rating was awarded.
You’ll notice in our comparison tables that the majority of platforms are unrated and the next biggest group has the top 4thWay Rating of 5/5 PLUSes.
It looks top heavy.
The reason for this is simply that the platforms that are open enough with us about themselves and their loan performance tend to be the ones that are both more established and more competent. So it’s unsurprising that they usually get the top score.
Those that don't supply enough information make it impossible for us to measure the risks of losses during a severe recession and we therefore can't rate them. Naturally this will include many that would either be too poor to deserve a PLUS Rating or those that are closer to the lower boundary. (So the P2P lending platforms supplying enough information to receive lower PLUS Ratings of 1 or 2 deserve serious credit for their openness.)
Lenders, like all investors, should always treat less transparent lending/investment opportunities with a lot more caution – either don’t invest or invest less.
All peer-to-peer lending sites and peer-to-peer IFISA providers are allowed to be listed on 4thWay.
In order for 4thWay's experts to do a good assessment of a platform and include them on the site, the platform needs to give us a large amount of information. First they complete our form with over 100 data points, then we do an email Q&A, then we meet one or more of their key decision makers, and finally we usually have more questions by email and other checks to do.
Regarding IFISAs, we only include IFISAs that we believe are legally structured in a way that means lenders effectively lend directly to individual or business borrowers, or to property owners. To put that another way, we include what we call peer-to-peer lending IFISAs, and no other kinds of IFISAs. This is because lending directly greatly reduces the risk of suffering any losses if the provider goes out of business.
Peer-to-peer lending allows you to earn an income and make money by helping other people or businesses to get out from the grasp of the banks.
You open an online account with one or more P2P lending companies, and then you can lend money to people or businesses. By cutting out the banks in this way, you receive more interest than you’ll get in savings accounts and borrowers pay lower interest rates than the banks will charge them.
It’s a new, amazing, social, emerging form of investment. That’s why it’s also called “social lending”, “democratic finance” and “crowdlending”. (The last is not to be confused with “crowdfunding”, which is buying shares in start-ups and that is usually extremely high risk.)
In a typical year, after deducting fees and bad debts, you can do far better than savings accounts at around 5% or even better than the stock market at closer to 10%. Very roughly speaking, higher interest rates can mean higher risk.
If you lend £5,000 today and make an average of 6% (after accounting for all the costs and any losses), after five years, you could have made well over £1,500, which is well over £1,200 for a basic-rate taxpayer and about £1,000 for a higher-rate payer.
A typical bank paying 2.5% interest for five years in a tax-free ISA would still pay out hundreds of pounds less, even for a higher-tax-rate paying P2P lender, at under £700.
Each P2P lending company works differently, sometimes dramatically so, but here’s how the basic model works:
Let’s say your neighbour, Fred, wants to borrow £15,000 for his building business. He applies for a loan through a P2P lending website, because it offers lower rates, and better terms and conditions than an ordinary bank. And probably because they won’t leave a nasty mark on his credit record just because he asked if he’s allowed a loan.
He could get a one-year loan, but he decides to spread the cost over five years.
The P2P lending website will then check out Fred, much like the banks through credit checks or what have you. Often they’ll do so even more thoroughly, doing up to 400 different checks on a borrower.
If Fred is approved for the loan, you and I will then be able to lend to him. Perhaps he’ll have a profile on the P2P lending website (or perhaps not). We might read it. Either way, we decide we want to help him out. Maybe I’ll be willing to lend £50 and you, £100.
We, and other lenders like us, will offer our money and state what interest rate we want. This is like a reverse auction, whereby the lenders who offer the lowest interest rates to the borrower win. I might offer 5% per year and you 7%, and we might both win, because we were both among the lowest bidders.
We’ll probably lend to lots of different borrowers to spread out our risks. As we receive our repayments, we’ll also probably decide to re-lend our money, plus the interest we’ve earned, so that we can earn even more interest.
We might even decide to sell our loans to someone else to get out early, or buy existing loans off other people if they’re at more attractive interest rates.
- All 70,000 people who are lending in the five of the safest P2P lending companies, and all 4thWay users who have followed our guidance, haven't lost a single penny between them!
- Losses in other P2P lending companies have been few and far between in the ten years since P2P began.
- The industry is also regulated by the UK's Financial Conduct Authority, which has not had to impose any fines or warnings on any company in the industry – which makes a change from the regular ticking off of banks.
But low risk is not no risk, and this is doubly so if you don't stick to the safest P2P lending companies. Read more about them and how the risks compare to savings accounts and the stock market in Is peer-to-peer lending safe?
You can lend to both individuals and businesses. You can lend to prime, low-risk, “A+” borrowers or high-risk, “C-” borrowers, and anything in between.
With dozens of P2P lending companies to choose from, the types of loans are expanding rapidly:
- Consumer loans.
- Business loans.
- BTL landlord and property developer loans and mortgages.
- Infrastructure loans (such as lending against energy projects).
- Loans against personal property (such as pawnbroking or taking rich people’s yachts as security).
- Loans against business invoices (where you pay businesses who are owed by their customers, and they pay you back plus interest when the customer repays.
- Payday loans.
If you don’t want to choose borrowers or set your own interest rates for each loan, some P2P lending companies will do all of this for you. You just have to tell them the minimum rate you’ll accept and the grade of borrower you’re interested in lending too.
They’ll then take care of the rest by spreading your money out across many such borrowers and even re-lending your money automatically as you receive repayments and interest.
However, you do need to decide where to lend initially and you need to keep an eye on the platforms. Read more about how to go about all this in our Learn section.
Throughout 2016 and 2017 we shall see more tax-free peer-to-peer lending accounts called “Innovative Finance ISAs”, which can mean £15,000 or more in tax-free lending.
Outside of those ISAs, for basic-rate taxpayers, the first £1,000 if interest earned through both savings accounts and peer-to-peer lending is tax free. For higher-rate payers, the first £500 is tax free.
Anything you earn beyond that is taxable.
Read the specifics of P2P lending tax in our guide: How is peer-to-peer lending taxed?
Some P2P lending companies will let you lend as little as £10 spread across 100 borrowers. Others require you to invest at least £10,000 in each loan you want to take part in. But most are around the £20 to £100 mark.
Theoretically, you can lend as much as you want, provided there are enough borrowers and the interest rates you offer to borrowers aren’t beaten by lower bidders.