Compare P2P lending accounts and IFISAs now

4-Step Strategy to Safe Peer-to-Peer Lending

Click "Learn" to get help

This page was last updated on 15 June, 2018

Safe peer-to-peer lending is not as risky as the stock market. Not by a long shot.

On average!

However, as with the stock market, the risks in P2P lending, including IFISAs, are not uniform. Some lenders will lose a lot of money over the next half century, simply because they don't have a plan or do no research.

That said, the risks in P2P can be reduced to a very low level with a simple, sensible strategy.

At the same time, the probable returns increase with a sensible plan, because lenders who focus on containing the risks get better results in the long run.

The four steps in brief

1. Lend regularly and re-lend repayments you receive.

2. Spread your money (and risks) across hundreds of loans.

3. Be prepared to commit to at least a medium-term (say, five-year) lending period if necessary.

4. Spread your money between a lot of different P2P lending websites and/or P2P IFISA providers with outstanding 4thWay PLUS Ratings combined with clearly high-quality services in picking loans or setting interest rates.

1. Lend regularly

As we have seen in other investments, such as shares, you dramatically lower your risk of losses if you're lending your income every month or three months, rather than just putting one lump sum in. You also need to re-lend the repayments and interest you receive.

The reason is that, if you do this, you can't accidentally put all your money in before an economic collapse. By spreading out, you get good deals and bad, but on average you can expect to do just fine. Perhaps even better than fine if you follow our other three steps:

2. Spread your money around

You wouldn't buy just one share on the stock market with all your savings. (We hope!)

Lending all your money to one borrower is also a highly risky thing to do. Imagine if a bank manager did that? She'd get fired from head office right away.

You should aim to spread your money between at least 100 borrowers. If you're going for higher-risk peer-to-peer lending companies, because you want to try and get higher interest rates, you should aim for considerably more than 100 borrowers.

Thankfully, many P2P lending websites make this easy by automating it for you and splitting your money between lots of borrowers.

In addition, you should spread your money between several P2P lending websites.

3. Commit to five years of lending

The stock market is so rocky that you can't even be confident of coming out well over 10 years.

Peer-to-peer lending is lower risk, because it's easier to predict what might go wrong with a basket of borrowers in a recession, and set interest rates accordingly. So we're confident that five years of regular lending and re-lending will see most people come out fine after five years.

That's even if we go through a bad economy where borrowers are going bad by the truckload. But you can only be kind of blase about lending over five years if you also follow rule four:

4. Spread your money between outstanding P2P lending companies

The vast majority of us should stick to the P2P lending companies and IFISA providers who take multiple steps to protect your money. They go for super-prime borrowers. Or they only lend your money against property that is valued much, much higher than the loan that is taken out.

They also usually have other defences which contribute to earning 4thWay PLUS Ratings. These things, which are weighed mathematically using international banking standards when calculating their ratings, include:

  • The type of lending.
  • The results of each historical loan.
  • The interest rates.
  • Whether they have pots of money set aside to pay expected bad debts.
  • Directors of the P2P lending companies promising to take the first loss on all loans.
  • And many other items.

Maintenance. Keep an eye on rising risks

If you follow the above 4-step strategy, you can expect to come out with satisfactory rewards, even if you have to suffer extra losses due to a recession similar to 2008.

However, while the P2P lending websites you put your money in today might have extraordinarily good borrowers and defences against losses, that won't always be the case for all of them. For some of them, their standards will slip.

We've written about why this is virtually inevitable for some of them in Why I Stick to Low-Risk P2P Lending and When The First Bad-Debt Provision Fund Will Fail.

So you have one more bonus task to do, which is to watch out for warning signs their standards are slipping and get out when you no longer recognise it as the safe company you first lent your money through.

These warning signs can include such things as late payments rising much faster than other P2P lending websites, much more loan applications being accepted and bad-debt provision funds shrinking fast.

Not all these P2P lending companies will retain their great 4thWay PLUS Ratings forever and subscribers to our email will be first to know when any of the P2P lending companies' standards are slipping.

Focus on safety, not high interest rates

Even when lending your money through the safest P2P lending websites, you should expect to earn an attractive premium over savings accounts, and that's after fees and taxes. Anything less and you have to begin to wonder what you're taking the risk for.

However, the most successful investors in other fields focus above all else on avoiding losses. That's right, while many people chase higher risk to get higher return, they're gambling in a way that, for most of them, will not pay off.

Many of the peer-to-peer lending websites have given zero losses to lenders. Others will have done just as well if you had spread your money among 100 of their best-grade loans.

We're not saying all of these will never cause losses, by the way. We have to assume losses will happen sometimes. But, over the medium-term, lending through a few of these, and splitting your money between hundreds of loans, is likely to give you satisfactory returns.

The rewards are good too!

This is rather like people who invest in the stock market through index trackers: the four-step strategy should lead the vast majority of individual lenders to a very attractive balance between risk and reward.

Not stock-market returns. But also not stock-market risks.

With simple lending strategies, it has been pretty easy for most lenders, even higher-rate taxpayers, to make real money over the past ten years, while lending through the safest P2P lending websites.

Looking at historical peer-to-peer lending returns you are likely to have earned far, far more interest than if you had stuck to savings accounts or cash ISAs.

Certainly, it would have been difficult for lenders adopting this four-step strategy to come out worse than if they'd just kept their money in savings – let alone to make a loss.

The rewards will vary in future, so keep an eye out that you're not chasing rates too low, especially compared to savings accounts.

This was part five of our ten-page P2P lending guide

The opinions expressed are those of the author and not held by 4thWay. 4thWay is not regulated by the ESMA or the FCA, and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.

Experts, journalists and bloggers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.

The 4thWay® PLUS Ratings are calculations that were developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the risks and rewards of losing money in scenarios up to a serious recession and a major property crash, and they assume you spread your money across lots of loans and rated P2P lending accounts or IFISAs. The rating is calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.

Today’s average interest rates

What is the “4thWay”?

There's the savings way, the property way, the stock-market way, and now there's the peer-to-peer lending way. The 4thWay® to save and invest.
Learn more.

What does 4thWay do?

We help people save and make more money, more safely when they cut out the banks and lend directly to other people and to businesses.

Why use 4thWay?

4thWay® is shaped by investors, bank risk modellers and a senior debt specialist, and we're governed by our users to ensure our comparison services and research are trustworthy and complete.

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×

Why are Orchard’s interest rates different?

Orchard’s lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Orchard’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Got it

×

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×
Back to top
[wpforms id="19476" title="false" description="false"]
[wpforms id="19884" title="false" description="false"]