Can you lose money with peer-to-peer lending?

Can you lose money with peer-to-peer lending?

Peer-to-peer lending is a form of investing and there is always a chance you may lose money, however, it works a little differently to traditional investments. Whether investing through an IF-ISA, so you’re protected from tax, or directly through a P2P provider, there should be processes in place to ringfence your money if the platform you’re using goes bust.

Here we look at the risks involved and compare them with the potential rewards - which can be interest rates of up to 6.01%, significantly higher than you’d get in a savings account.

What are the risks of peer-to-peer lending?

Peer-to-peer lending cuts out the middleman, the bank, so there are less costs involved with investing your money. You can lend to an individual, a business, or to property developers and you’ll earn interest on the money, of up to 6.01% in some cases*

But what happens if the company you’ve invested your money with goes bust? While P2P lenders may look a lot like traditional savings accounts in many other ways - they even have their own IF-ISA for example - with UK banks or financial institutions, any money is protected if a provider were to fail. This falls under the Financial Services Compensation Scheme (FSCS) and it covers the first £85,000 of your money kept with one institution. 

P2P lenders don’t have this protection, even though they have been regulated by the Financial Conduct Authority (FCA) since 2019, therefore your capital is always at risk. 

What do peer to peer providers have to do to protect consumers?

Under the FCA ruling, there are a number of things P2P companies need to do for potential consumers. This is to make sure anyone considering investing their money knows exactly what the risks are, what would happen if things went wrong, and how the process works. 

These include the following:

• New customers are only allowed to invest 10 per cent of their investable assets into P2P firms, unless they have received financial advice.

• For those who haven’t received professional financial advice, P2P companies need to check you understand exactly what will happen to your money by asking lots of questions.

• You’ll need to be given information on what will happen if a firm fails and what processes are in place - Also known as an ‘orderly wind-down’ of the business.

• Any risks to your money need to be clearly and simply communicated.

• All P2P firms also need to hold at least £50,000 in capital as a buffer should there be any big changes in the economy.  

What should you be aware of?

There are lots of P2P companies on the market and it’s important to pick one you’re happy with, which will give you a good return, but also a firm that knows what it’s doing and one with a plan in place to deal with any bumps in the road. Here are a few important points to remember when choosing one:

• Not all companies are the same, look for one with a good reputation and reviews and a company that gives you all the information you need before you part with any cash. 

• If you change your mind you may not be able to get your money back straight away, the company should tell you the usual time frame for this, including any scenarios where your payment would be delayed. As the money has been lent to another party, you may have to sell your loan to another investor to get the cash back.

• Interest rates aren’t set in stone. The rate you’re given is a predicted amount you will be paid on your investment. The firm should give you an indication of how often they pay out these predicted rates and how likely it is you’ll get it.

• You can invest through an innovative finance ISA, or IF-ISA, with some lenders including easyMoney. This means any interest you earn is tax free, up to the annual allowance. Even if you don’t use an IF-ISA, any returns you make are also protected under your personal savings allowance.

How is your money protected?

As well as the FCA requirements, P2P companies are required to have a system in place if they go under. Also known as an ‘orderly wind-down’ of the business, it usually involves a third party, being set up to handle existing loans and money due. You should be told about this before you deposit your money.  

When you lend money through a P2P platform, it’s also worth remembering that the money you are sending is going to another person, business, or property developer to use. The relationship is between you and them and therefore if the P2P firm goes bust, it shouldn't affect this relationship, or the money involved.  

Is peer-to-peer lending worth it?

Ultimately if you are thinking about P2P lending, you need to make sure you are fully aware of how it works, and all the risks involved.

It’s not as easy as depositing your money and then receiving it back with a high interest rate after a few months and although it seems similar, it’s not a traditional savings account. You are investing the money and there is a risk you could lose it all. 

It is important to remember that while you could lose any money you put in, the risk of this happening is relatively low. It still exists but when comparing P2P lending to other types of investments the risks need to be understood. 

However, as with any investment the potential returns are balanced with the risk and that is the reason many people choose P2P over other savings vehicles.  Traditional savings accounts are offering dismal rates of return which are significantly lower than those available through P2P firms.

To get started with P2P lending you need to be comfortable with the risks and you need to pick a company you’re happy with. Taking the time to understand exactly what will happen - in all scenarios - is important so you aren’t left with any nasty surprises down the line. 

*easyMoney’s target rate of return for the High Net Worth investors product is 6.01%. To qualify for this product, investors must have £100,000+ invested.

All the facts and figures presented are accurate at the time of posting.

easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated in property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.

easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.