Your questions about peer-to-peer lending and IFISAs
Peer-to-peer lending, also called “social lending”, “marketplace lending”, “ethical lending, “democratic finance” and “crowdlending”, 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 others. By cutting out the banks in this way, you receive more interest than you’ll get in savings accounts. Borrowers can pay lower interest rates than the banks will charge them, or they can be treated better and get better terms and conditions.
There are many types of peer-to-peer lending: lending to fund property developments, lending to individuals, lending to small businesses, lending to landlords, and more.
In most countries, “peer-to-peer lending” is not a regulated phrase and so how the lending is legally structured can mean different things in different countries – and also to different people within a country. It includes several legal structures across Europe. But it's all just part of the bigger lending space of online direct lending that we at 4thWay call “P2P”.
- Hundreds of thousands of people in the UK have been lending through P2P lending accounts and P2P IFISAs, and the vast majority have made money. We believe that every single lender who has followed all 4thWay's key guidance will have made a profit.
- This type of investing has had no losing years for investors since it started in 2005, after bad debts and costs. In contrast, one-in-three years have been down years for stock-market investors, when you take all their investing costs into account.
But low risk is not no risk, so you must do your research to understand what you're doing. For an excellent start, read our 10 Core P2P Lending Guide pages.
Each P2P lending company works differently, sometimes dramatically so, but here’s how one of the most common models work:
A person or company wants to borrow some money. For example, it could be your neighbour looking to buy a car, a business person looking to grow her business, or a local landlord or property developer looking to make the next acquisition or renovate.
The prospective borrower gets in touch with a peer-to-peer lending company, because it probably offers better service, interest rates, or terms and conditions than the banks.
The P2P company does a thorough check of the applicant, rather like how banks do. In this case, the loan is approved and the interest rate agreed.
Then, you and other individuals lend your money to that borrower to fund the loan, with £50 lent by you, £10 by someone else, a third person lending £1,000, and so on.
You might choose your individual borrowers yourself or allow the P2P lending company to automatically allocate your money into different loans.
As lenders receive repayments and interest, most decide to re-lend. Lenders might also buy existing loans from other people to spread across more loans more quickly or to take part in especially attractive deals.
Peer-to-peer lending pays you many times more than savings accounts, yet with lower risk than the stock market even when you commit your money for less time. Read more in Peer-to-Peer Lending Vs Other Investments.
There are tax-free peer-to-peer lending accounts called “Innovative Finance ISAs”, which can mean £20,000 or more in tax-free lending every year.
Outside of those ISAs, for basic-rate taxpayers, the first £1,000 of interest earned in a year through both savings accounts and peer-to-peer lending combined is tax free. For higher-rate payers, the first £500 is tax free. This typically means lending around £10,000 to £20,000 per year before being taxed.
Anything you earn beyond that is taxable.
Sometimes you might face other taxes. Read about taxes on P2P lending in our guide: How is peer-to-peer lending taxed?
You can lend to both individuals and businesses. You can lend to prime, low-risk borrowers, or to high-risk borrowers, and anything in between.
With dozens of P2P lending companies to choose from, the types of loans are expanding rapidly:
- Mortgages and short-term loans to landlords, property owners and property developers.
- Small business loans.
- Personal loans.
- 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.
- Loans against business assets, such as machinery or farmers' crops.
- Payday loans.
- Loans to fund legal cases.
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 quality borrowers willing to pay fair interest rates.
It's been easy for lenders using simple lending strategies to earn 5%-8% per year, after bad debts and costs, since P2P lending started in 2005. You can try to earn more, but naturally the more interest you push for the greater the risks.
If you lend £10,000 today and make an average of 6%, after costs and bad debts, you could have made well over £3,000 in five years. Since £10,000 is not a huge sum, it's likely to be tax free for most lenders even if you don't wrap your lending in a completely tax-free ISA. (See the FAQ “Is peer-to-peer lending taxed?”)
Over any five-year period, savers using the top cash ISAs would have earned thousands of pounds less.
Please see this page for a proper answer to that.
Most P2P lending companies allocate borrowers to you and set the borrowing and lending interest rates.
If you want to be in complete control yourself, some P2P companies allow you to choose your borrowers. Occasionally, you can even bid what interest rate you'll be willing to accept from a borrower, in a kind of reverse auction.
Usually, you just hold the loans until borrowers repay them naturally, so there's typically nothing to do but wait. (Indeed, waiting for natural repayments is the lowest-risk way to lend money.)
However, you can sometimes sell your loans early – if the P2P lending provider has that facility but usually only if there are lenders who want to buy at the right time, which is not always the case, even at the best P2P lending providers. When you sell early, you usually are only able to do so if your loans are doing well and you sell them for the full amount. Occasionally, you're allowed to set the price you'll accept for your loans, which is another decision to make.
Yes, usually, provided lending isn't your main business.
Take a look at our guide page Can Your Business Lend Through P2P? to see which P2P lending websites we asked about this and what the conditions are.
Your questions about 4thWay
We at 4thWay are professional risk modellers, fund managers, experienced investors, investment journalists 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 the 4thWay comparison site and ratings ourselves, we know it's very important that you know you can trust us to be fully candid, open and impartial. And you can!
Although no-one can be perfect forever, we still have a 100% record in ratings and in buy and sell recommendations.
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. It's why our users rate us over 9/10.
Please check out our full explanation of the 4thWay PLUS Ratings and 4thWay Risk Scores.
You’ll notice in our comparison tables that the majority of platforms are unrated and the next biggest group has the top 4thWay PLUS Rating of 3/3.
It looks top heavy.
Actually, it's bottom heavy. Most peer-to-peer lending sites and IFISA providers are not good enough, or have too short a history, to earn a rating.
A number of typically poor quality providers choose not to give us enough access and information for us to assess them for listing in our detailed comparison tables.
Also, most of the weaker P2P lending companies fail very quickly. Often before they'd even approved their first loan.
Of those that have achieved a positive rating, most of them do currently have the top rating. There are two main reasons for this:
- The peer-to-peer lending websites 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.
- The 4thWay PLUS Ratings are a measure of both risk and reward. The industry is still relatively new, which means that many peer-to-peer lending sites are still so small they can easily pick the very best borrowers, which lowers the risks. Plus, while lenders are warming to peer-to-peer lending, many still demand higher interest rates. This boosts the reward side too.
All peer-to-peer lending sites and peer-to-peer IFISA providers are allowed to be listed on 4thWay.
In order for 4thWay's specialists to do a thorough assessment of a provider and include them on the site, the provider 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 at least once, we then usually have more questions by email, they then provide more reams of data and documentary evidence, and finally we have other background 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.
4thWay's specialists absolutely rely on being able to access high quality information from P2P lending sites, as well as access to interview their key people, in order to provide a listing on 4thWay.
All peer-to-peer lending websites and P2P IFISA providers are welcome to be listed in the 4thWay comparison tables, simply by granting transparency and openness to us. Dozens of lending accounts are now listed as a result.
There are seven different reasons why a peer-to-peer lending website or P2P IFISA provider doesn't appear in the 4thWay comparison tables, which are laid out below.
Providers not in 4thWay's comparison tables
The number in brackets corresponds to the reason set out below.
|P2P/IFISA provider||P2P/IFISA provider||P2P/IFISA provider|
|ArchOver (2)||Elfin Market (3)||Money & Co (3)|
|Assetz Capital (2)||Folk2Folk (4)||The Money Platform (3)|
|Bramdean Asset Management (1)||Fund Ourselves (formerly Welendus) (3)||Property Crowd (2)|
|Brickvest IM (1)||FutureBricks (1 and/or 3)||Property Partner (2)|
|British Pearl (1)||GrowthFunders (1)||RateSetter (2)|
|Bayonet (1)||Guarantor My Loan [Match the Cash Limited] (3)||Rockpool (3)|
|CARLTON Bonds [formerly MAVEN] (1?/3)||JustUs (3)||ShareCredit (3)|
|Cogress (1)||Kriya [formerly MarketFinance] (2)||Shojin (3)|
|CP Capital (3)||Landbay (2)||Simple Crowdfunding [Focus 2020 Limited] (3)|
|Crowdahouse (1)||LandlordInvest (7)||Triodos Bank (3)|
|Crowdestates (3)||Leap (3)||UK Bond Network (2)|
|Crowd for Angels (3)||LendingCrowd (2)||Unbolted (4)|
|Crowdstacker (3)||Lending Works (2)||WiseAlpha (3)|
|cur8 [IFG.VC Limited] (1)||LendInvest (1)||Zopa (2)|
Reason 1: the LendInvest reason – not “pure” P2P
4thWay does its level best to ensure that it just lists pure peer-to-peer lending websites. LendInvest is not proper “P2P”. In peer-to-peer lending, you lend directly to the end borrower or another legal means is used to make sure that there is a direct link between lenders and borrowers.
With LendInvest and some other online lending websites, the link is not direct. In that case, there can be additional risks to you if these businesses go under.
The main additional risk is that you are more likely to find that you are no longer entitled to receive all your outstanding loans; for example if LendInvest owes Barclays Bank then the risk could be greater that Barclays would be able to claim some of your loan repayments.
This is not to say that LendInvest is not a good investment. It is just that 4thWay's experts and journalists stick to analysing pure P2P lending opportunities.
British Pearl is another example of a lending platform that is not peer-to-peer lending.
Reason 2: the Landbay reason – no longer P2P
Landbay, ThinCats and others did initially do some peer-to-peer lending, but they have withdrawn from this model. Therefore, they're no longer listed.
Reason 3: the easyMoney reason – not enough info
easyMoney is not listed because it hasn't supplied us with anything like enough information to assess the risks and populate our comparison pages – or to keep our comparison pages up-to-date.
Lack of information is the most common reason for a P2P lending site or IFISA provider not to be listed on 4thWay.
Before a P2P lending site can be listed on 4thWay:
- We collect over 100 data points from them.
- Then do an email Q&A.
- Then we do some research on our own about the business and its key people.
- Then at least one of our experts interviews their key decision maker(s) at least once.
- Then we usually do another follow-up email Q&A.
- We try to get further data from them.
- And then we do some standard checks such as looking at their published accounts and their entry on the financial regulator's register, as well as further checks on the key people.
We have very detailed comparison tables (which you can see if you go to the comparison table, check the boxes to the right of any opportunities you're interested in and click on “Compare selected”). The P2P lending sites also need to have given us answers to almost all of that before they get put on the site.
Since easyMoney has not provided us with much information, we are also not confident that it is genuinely P2P lending, rather like LendInvest. We shall look into that if easyMoney ever decides to go through our rigorous checks.
Almost all of the providers shown in the table above are not on 4thWay due to lack of information.
Reason 4: listing is imminent
Sometimes, a peer-to-peer lending company has provided us with enough access to them and information, but we are currently in the process of other checks or preparing their entry.
Reason 5: new lending is temporarily paused (e.g. due to COVID-19)
When a P2P lending or IFISA temporarily stops taking new lenders on, they are removed from the comparison tables. Existing lenders can still read our reviews of those providers here.
Reason 6: not listed for reasons beyond the P2P lending company's control
While there has historically been one P2P lending company that wasn't listed for this reason, it doesn't currently apply to any of them.
Reason 7: de-listed at the P2P lending company's request
As a courtesy, LandlordInvest was removed from 4thWay's comparison tables, at its request, after it lost its 4thWay PLUS Rating. (Its rating was lost not due to a deterioration in its performance, but because we didn't receive quite all of the data required to sustain the rating through reassessments on a regular basis.)
Read descriptions of All The Peer-To-Peer Lending Companies In The UK or visit our comparison tables for highly detailed information and reviews on the P2P lending companies that have gone through 4thWay's intensive assessment.