Your questions about peer-to-peer lending and IFISAs
Peer-to-peer lending, also called “social lending”, “marketplace 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.
- 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. 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 P2P lending company that focuses on the specific type of loan that is required and which probably offers better service, terms and conditions than a bank. 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 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 of interest earned through both savings accounts and peer-to-peer lending combined 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 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 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.
- 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 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?”)
A bank paying what's currently the top rate of about 1.7% interest for five years in a tax-free ISA would pay out thousands of pounds less, at under £900.
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.
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!
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 9.3/10.
4thWay® PLUS Ratings reflect our 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. In some cases, one-PLUS rated lending accounts might have a small number of outsized loans which, if they turn bad, create the risk an overall loss. 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 by the borrowers. 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 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 large 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 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 at least once, we then usually have more questions by email, 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 are now listed as a result.
There are five 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 site/IFISA provider||P2P site/IFISA provider||P2P site/IFISA provider|
|Abundance (3)||Elfin Market (3)||Money & Co (3)|
|Ablrate (3)||Folk2Folk (3)||The Money Platform (3)|
|Assetz Exchange (4)||Freeducation (3)||Property Crowd (2)|
|AxiaFunder (4)||Funding Circle (5)||Property Moose (3)|
|Bramdean Asset Management (1)||Fund Ourselves (formerly Welendus) (3)||Property Partner (2)|
|Brickvest IM (1)||FutureBricks (1 and/or 3)||Propio (4)|
|British Pearl (1)||GrowthFunders (1)||RateSetter (2)|
|Bayonet (1)||Guarantor My Loan [Match the Cash Limited] (3)||Rockpool (3)|
|CARLTON Bonds [formerly MAVEN] (3) (1?)||JustUs (3)||ShareCredit (3)|
|Cogress (1)||Landbay (2)||Simple Crowdfunding [Focus 2020 Limited] (3)|
|Crowdahouse (1)||Leap (3)||Triodos Bank (3)|
|Crowdestates (3)||LendingCrowd (5)||UK Bond Network (2)|
|Crowd for Angels (3)||LendInvest (1)||Unbolted (3)|
|Crowdstacker (3)||Lendwise (3)||WiseAlpha (3)|
|EdAid (1)||MarketFinance (3)||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 the Get more details button). 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 table. Existing lenders can still read our reviews of those providers here.
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.