Your questions about peer-to-peer lending and IFISAs
Peer-to-peer lending, also called “social 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 and borrowers pay lower interest rates than the banks will charge them.
- Hundreds of thousands of people have been lending through P2P lending accounts and P2P IFISAs and the vast majority have made money. We believe that all lenders who have followed 4thWay's guidance will all have made a profit.
- 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, so you must do your research to understand what you're doing. For an excellent start, read our 10-page beginners' guide.
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.
Peer-to-peer lending offers inflation-beating returns 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.
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.
Sometimes you might face other taxes. Read all the details on 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 high-risk 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.
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.
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.
Please see this page for a proper answer to that.
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.
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?
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 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 the loans held by an average lender might do in different scenarios, such as in 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%.
The 4thWay PLUS Ratings are created by bank quantitative risk modellers, senior credit specialists and experienced investors.
+++ PLUS Rating: average lender expected to make money through a severe recession and major property crash. Exceptional calculated risk-reward balance.
++ PLUS Rating: average lender expected to make money through a moderate recession and property crash. Excellent calculated risk-reward balance, sometimes with potential for higher interest rates.
+ PLUS Rating: average lender expected to make money through blips and in normal times. Fair calculated risk-reward balance.
No Rating: not enough information provided to us, not enough history to be rated, or the average lender is expected to do badly. You can potentially find newer opportunities with very strong offers and very high interest rates, but you need to take more time to read about and understand them.
The 4thWay PLUS Ratings are based on the assumption you spread your money across lots of peer-to-peer lending accounts/IFISAs and across hundreds of loans, and that you hold onto the loans until they are fully repaid. If you re-lend your money every month, you lower your risks further.
The 4thWay PLUS Ratings are indicators, not guarantees. Read more about the 4thWay PLUS Ratings, as well as the 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.
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. (And a large number of them do not provide enough information to be listed in our detailed comparison tables.)
However, of those that are rated, 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 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 are still wary, so they demand higher interest rates in return for their uncertainty. 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 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.
All peer-to-peer lending websites and P2P IFISA providers are welcome to be listed in the 4thWay comparison tables, simply by providing our experts with sufficient information. Dozens are now listed as a result.
There are three reasons why a peer-to-peer lending website or P2P IFISA provider can fail to make it into the 4thWay comparison tables, which are laid out below.
Providers not in 4thWay's comparison tables
|P2P site/IFISA provider||P2P site/IFISA provider||P2P site/IFISA provider|
|Abundance (3)||The House Crowd (3)||Orchard Lending Club (3)|
|Ablrate (3)||Invest & Fund (3)||Property Crowd (3)|
|Basset & Gold (3)||JustUs (3)||Property Moose (3)|
|British Pearl (1)||LandlordInvest (3)||Property Partner (3)|
|Crowdestates (3)||LendInvest (1)||QuidCycle (3)|
|CrowdProperty (3)||Lendy (3)||Unbolted (3)|
|Crowdstackers (3)||Loanpad (3)||Welendus (3)|
|easyMoney (3)||The Money Platform (3)||Wellesley & Co. (2)|
|Folk2Folk (3)||Octopus Choice (3)|
The number in brackets corresponds to the reason below.
Reason 1: the LendInvest reason – not “pure” P2P
4thWay 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 Wellesley reason – no longer P2P
Wellesley & Co. did initially do some peer-to-peer lending, but it has withdrawn from this model. Therefore, it is no longer listed.
Reason 3: the Lendy reason – not enough info
Lendy is not listed because it hasn't supplied us with anything like enough information to assess the risks and populate our comparison pages.
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 at least one of our experts interviews them, and then we do another email Q&A. Plus we do some standard checks such as looking at their published accounts and their entry on the financial regulator's register.
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 the Get more details button). The P2P lending sites need to have given us answers to almost all of that before they get put on the site.
Since Lendy has not provided us with much information, we are also not certain that it is genuinely P2P lending, rather like LendInvest. We shall look into that if Lendy 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.