P2P Lending: How And When You Can Access Your Money
This page was last updated on 28 December, 2019
This guide tells you how most P2P lending sites and IFISA providers work when it comes to you exiting your loans. And for the most part getting your money back does work as well as you want it to.
But, firstly, please consider this:
There will be times when selling your loans to exit early takes longer than you hoped – possibly a lot longer. And during those times there's no guarantee you'll find someone to take the loans off you.
Especially in times of recessions and panics, it will be harder to get rid of your loans quickly and you might even have to take a loss if you want to sell them before the borrower repays, e.g. you might have to sell your loans for 95p in the pound. That's if the P2P lending website/IFISA provider lets you sell at all under those circumstances.
You see, the natural fit for lending your money is to lend until the borrowers repay their loans. If you try to fight that time frame by leaving early, you might not always win. No matter how good the P2P lending companies are that you use.
That said, the same applies when leaving any investment; for example, you will take a hit if you need to sell shares in the stock market at a time when they have fallen a lot in price. But at least with peer-to-peer lending you can simply let the investments – the loans – be repaid to you naturally, while earning interest. With shares, you must sell to exit, and your investment horizons often need to be many years longer to be confident of satisfactory results.
You can read a lot more about the difficulties you might face in both lending your money swiftly or getting it back early, as well as 10 strong ways to combat those problems, in 10 Ways To Get Your P2P Lending Money Back!
Getting your money back when using auto-lend
Some P2P lending accounts and IFISAs spread your money across loans automatically or have similar “auto-bid” or “auto-lend” features.
When it comes to getting your money back from these sorts of accounts, a 4thWay user summed up the biggest question very nicely:
“Would I be able to withdraw my loan plus interest at the end of a set period like I would with a standard fixed term savings account, or is it dependent on when individual loans that have been made are repaid?”
That's a relatively short question with a long answer.
Usually it's dependent on when loans are repaid. You receive repayments every month that include some of your original loan as well as some interest. These loans are typically from one to five years, so those payments will occur within that time (excluding any bad debts still outstanding at the end).
Some borrowers will repay early, so you can expect to get at least some money back earlier than you expected.
Re-lending can extend how long you lend for
For most lending accounts, partly due to early repayments made by the borrowers, you can expect to receive most of your money back within a couple of years.
That's unless you choose to automatically re-lend any repayments and interest you receive. If you do, it will extend how long you lend for, because those re-lent amounts could go into new loans. Those new loans could be for up to five years in some kinds of lending.
For example, if you've been lending for one month in a five-year account, and then you re-lend the first month's repayment, you might now lend for a total of five years and one month. After two months, re-lending could extend your total lending time to five years' and two months.
If you want to avoid a situation like this you could lend – and re-lend monthly – by using lending accounts that are for 3-5 years to begin with, but in about one year's time you could just re-lend your money in accounts of three years, and then in 2-3 years' time just lend in accounts that tie you in for even shorter periods.
Re-lending has the added advantage that it lowers your risks and can help to spread your money across even more borrowers.
If you don't want to switch to accounts that offer loans and lending over shorter periods, you could switch off re-lending 2-3 years before you want your money back. You can usually expect to have been paid the vast majority of your money back by that point.
Exiting your loans early – before they are repaid
Most P2P lending accounts and IFISAs will also allow you to get some or all of your money back early, i.e. before the borrowers repay the loans.
To get your money back early, the P2P lending website automatically matches your loans to another lender who wants to lend at the same time you want to exit. That other lender takes your loans off you and you get repaid.
In other words, your loans are sold to another lender. This is rather like how you sell shares on the stock market – your sell order is matched to a buy order elsewhere, automatically. There are two key differences though. Firstly, on the stock market, you will sell for a lower or higher price than when you bought in, but this doesn't usually happen in peer-to-peer lending.
Secondly, when all is going smoothly, this trade in peer-to-peer lending typically takes a day or a week to go through. In the stock market, it's usually instantaneous, because there are far more people and businesses trading on it.
These options to return your money early are often called things like “easy access” or “rapid return”. So far, this has mostly worked incredibly smoothly, but please heed the warning in between the gold lines at the top of this page: these are not savings accounts, so sometimes you might suffer huge delays in getting hold of at least some of your money.
Unlike just letting your loans be repaid naturally by the borrower, there are usually some costs and charges in selling your loans early to another lender in this way.
Typically these add up to between 0.5% and 1.5%, although so long as you've been lending for at least a few months you will likely have earned enough interest to cover the costs already.
Automated accounts usually have reserve funds set aside to cover expected losses, which means you can even, usually, get your money back on loans that have gone bad. To enable this, the reserve fund will pay you any outstanding loan amounts – so long as it has enough cash in it to do so.
I think there's just one more type of automated account to talk about. This is rare, but there are some P2P lending accounts where the expected time you'll be lending for does not match the amount of time the borrower is borrowing for.
For example, RateSetter automatically re-lends your money. Unusually, there is no option to simply allow borrowers to repay you in a kind of soft exit. In other words, you always have to sell your loans to get out.
RateSetter's many great qualities aside, this mismatch could at times be a potential problem. Getting your money back when you expect to will depend on other lenders being willing and able to buy you out.
That said, when RateSetter is unable to sell your loans at your request, it will stop re-lending your money. You'll start receiving repayments from borrowers naturally until RateSetter is able to sell.
You could also pre-empt such issues before your deadline for withdrawal. Simply start to withdraw part of your money in several stages a little earlier than when you want all your money back.
Getting your money back when you choose loans yourself
When you choose individual loans yourself, you lend in each loan until it's repaid. Loans could be repaid early and often are.
Selling your loans before they're repaid by the borrower
If you want to leave early – before the borrower has repaid – you can usually sell individual loans of your choice to other lenders. You might also be able to make partial sales of individual loans.
Some lending websites enable you to sell multiple loans automatically.
To sell loans early, expect to pay fees of up to 1.5%, normally. On top of that cost, you might sometimes get back a slightly different amount than your outstanding loan. This might be a little bit less, but it could also be a little bit more.
Sometimes, you can sell your loans for a lot more than you paid, making a significant gain. (For an example of this in action, read The Safest 20% Returns In P2P Lending. For tax tips on selling loans for a profit, see How Is Peer-to-Peer Lending Taxed? )
At other times, if you really need your money before the loan is simply repaid by the borrower, you might have to sell your good loans for a substantial loss. At present that is just theoretical, as it's not happened yet. But it's most likely to happen during financial crises when people are scared of lending, or when lenders get the jitters about that specific P2P lending site you are using.
Sometimes – and again, especially likely during crises – you might find it difficult to sell your loans at all, if there are no lenders who want to buy them off you. You might have to sit it out.
If the borrower is late on making payments or if the loan has gone bad, you usually can't sell these loans early. You have to wait and see what happens.
Which sites let you leave loans before they're repaid
You can see which P2P lending sites allow you to leave and what the costs are in Where Can You Buy Or Sell Existing Loans? (The automated accounts are in the separate table at the bottom of that page.)
You can also see more details about any features, such as automated buying and selling options, like this:
- Go to the comparison table.
- Select the checkboxes on the right of the P2P lending products that interest you.
- Click the “Get more details” button at the top of the page.
Please lend across lots of P2P sites, not just one!
Worried about getting your money back? Read 10 Ways To Get Your P2P Lending Money Back!
Articles and guides mentioned above:
Read the RateSetter Review.
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