Understanding UK P2P loans
This is a financial promotion and is intended to provide information, not investment advice.
Did you know that peer-to-peer lending was invented in the UK? Zopa launched the first P2P lending platform 20 years ago in 2005, and since then the asset class has grown into a global phenomenon, with P2P lenders now operating in most countries.
In the UK, the P2P lending market has evolved considerably over the past two decades. Zopa has long since left the market, rebranding as a bank instead, and a number of new entrants have sprung up with unique offerings.
But how does P2P lending work in the UK? And what are the benefits and risks involved?
P2P meaning explained
P2P loans are a form of lending where individuals can borrow money directly from other individuals, bypassing traditional banks and financial institutions. The word "peer" refers to the lender and the borrower, both of whom participate in the lending process through a P2P platform. These platforms are typically online marketplaces that connect borrowers and investors, allowing them to agree on loan terms without the need for an intermediary such as a bank.
How P2P loans work in the UK
In the UK, all P2P platforms must be regulated by the Financial Conduct Authority (FCA), which means that they are actively monitored for compliance, and must meet certain standards of performance. For instance, all P2P lending platforms in the UK must feature prominent risk warnings on their websites and in any official communications, and all new investors must fill out an appropriateness form to ensure that they fully understand what they are investing in.
In the UK, P2P loans operate through online platforms that match borrowers with lenders. This typically follows a standard four-part process:
1. Application: Borrowers looking for a loan apply through a P2P platform. They typically provide details such as the amount they wish to borrow, the purpose of the loan, and their credit history. The platform will assess the borrower’s creditworthiness and decide whether it wants to onboard them.
2. Listing: If the borrower’s application is approved, the loan is listed on the platform. Some P2P lending platforms allow investors to manually select the loans that they wish to back, while others offer an auto-invest service, where each investment is automatically diversified across a pool of similar loans. The benefit of auto-investing is that should one individual loan go into default, the investor will not lose all of their money, only the small portion that was allocated to that loan.
3. Funding: Multiple investors can contribute smaller amounts to fund a loan. For instance, if a borrower needs £10,000, the platform might allow 100 different investors to each fund £100 of the loan. This is one of the ways in which P2P lending platforms mitigate risk - by spreading the investment across multiple individuals.
4. Repayment: Borrowers repay their loans through the platform in monthly instalments. The platform collects these payments and distributes[VH1] [KG2] them to the investors based on the amount they contributed, or reinvests them if the investor has chosen that option.
Benefits of P2P loans
For borrowers, the key benefit is the access to funding. P2P lending platforms can often offer flexible loan terms, favourable interest rates and a quick and easy onboarding process.
For investors, the benefits include access to competitive returns, as well as portfolio diversification. Many UK P2P investors also appreciate the opportunity to directly finance UK businesses, thereby supporting the growth of the economy.
Risks associated with P2P loans
The biggest risk involved in P2P lending is the risk of default. This is where a borrower is unable to keep up with repayments. One way to manage this risk is to take collateral on each loan, which can be realised through a recovery process in the event of a default.
easyMoney takes property as collateral on every listed loan. To date the platform has been able to maintain a zero-capital loss record for investors by taking a conservative approach to lending, which includes the use of collateral.
Is P2P lending right for you?
P2P loans in the UK provide a unique opportunity for both borrowers and investors to bypass traditional banking systems. Borrowers can access competitive interest rates, and investors can earn higher returns compared to traditional savings methods.
However, like any financial product, P2P loans come with their own set of risks. It is essential for both parties to do their research and understand the dynamics of P2P lending platforms before committing to this form of borrowing or investing.
Capital is at risk. Past performance is no guarantee for future results.
Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.