Peer-to-peer (P2P) is a form of lending and borrowing between individuals and businesses, or ‘peers’, without a traditional financial institution such as a bank or building society being involved. Find out the pros and cons of P2P finance.
What’s in this guide
What P2P borrowing is
P2P websites match people looking to borrow money with those looking to lend it. The companies that provide these services (called ‘platforms’) act as intermediaries between borrowers and lenders.
P2P lenders can offer lower interest rates than traditional lenders such as banks. Whether this is the case for you will depend on certain factors such as your credit score.
How to apply for a P2P loan
To apply, go to one of the lending sites and register. Select the amount you want to borrow and for how long.
If you qualify for a loan after a credit check, you’ll be told the interest rate.
P2P lenders normally ‘parcel up’ loans between lots of different people. This means that a number of individual lenders will each agree to lend a share of the total amount you want to borrow.
Depending on your credit score and the platform you’re using, you might be offered less than you want to borrow.
Pros of P2P borrowing
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- P2P loans can offer a lower interest rate than banks or building societies, especially if you’ve got a good credit score.
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- Some P2P websites have no minimum loan amount, which might suit you if you only want to borrow a small amount for a short time.
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- They might be an option if you have difficulty getting a loan from a bank or building society.
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Most borrowing offers flexible repayment, and you won’t usually have to pay any extra fees for paying the loan back early.
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Loans are unsecured, so there’s no need to use an asset such as your car or home as collateral.
Cons of P2P borrowing
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If you default on a loan, the lender might pass the debt on to a debt collection agency. As a last resort, the lender might take you to court to try to get back the money you owe. Find out more in our guide What is a County Court Judgment (CCJ)?
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You might have to pay a fee to the platform for arranging the loan, even if what you’re asking for from any one lender is not the whole amount you want to borrow. This can mean you’ll have to pay multiple fees if you have to apply to more than one lender to cover the total amount you are looking for.
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One lender might charge you one rate for the amount they’ll lend to you but other lenders offering to lend you the balance (or their part of the balance) might each charge different interest rates.
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P2P loans are only available online.
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You can only borrow up to £35,000.
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You might not have the same protection through the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS). It’s important to check what protection you do have before you take out the loan.
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Alternatives to P2P borrowing
Different credit products are suitable for different needs.
If you’ve got a poor credit score or no credit history, and have been turned down for a loan from a high-street lender such as a bank of building society, you can apply for other forms of credit, such as for a loan from a Credit Union or a Community Development Finance Institution.
Options for borrowing money
Use our Your options for borrowing money tool to see a range of credit options that could suit your needs.
- see ways to borrow up to £50,000
- read the pros and cons of each one
- decide which option suits you best.
What P2P lending is
If you want to lend money, compare P2P lenders and find one you’re comfortable with.
There are three main steps:
- Open an account with a P2P lender and pay some money in by debit card or direct transfer.
- Set the interest rate you’d like to receive or agree one of the rates that’s on offer.
- Lend an amount of money for a fixed period of time – for example, three or five years. You might have to pay a fee to lend money, such as 1% of the loan.
Some lenders have an ‘autobid’ feature. This means you can set limits on how much you want to lend each business and the lowest interest rate you’re prepared to lend at.
Understanding the risks
P2P lending can be risky. It’s useful to understand the risks and how they can be reduced.
The risk of default
The person or business you lend money to might not be able to pay it back (this is called ‘defaulting’).
The higher the default rate on a P2P website, the higher the number of people or businesses that are unable to repay their loans.
Unlike bank and building society savings, where your savings are protected up to the first £120,000, the money you lend via a P2P platform isn’t covered by the Financial Services Compensation SchemeOpens in a new window This means you could lose anything you invest.
However, many P2P websites have contingency or provision funds, which are designed to pay out if a borrower defaults on their loan.
These provision funds vary widely from one site to another, so it’s important to know what’s covered if you’re thinking of becoming a lender.
The risk of early or late repayment
If your loan is repaid early or late, you could make less profit than you’d expected.
If a loan is repaid early, you can simply lend out the money again.
But there is a chance that you might not be able to lend out at the same interest rate.
The risk of the P2P site going bust
You could lose money if the P2P company goes out of business (as several have done).
If they’re regulated by the FCAOpens in a new window – as all P2P lenders operating in the UK must be - they must keep lenders’ money in ring-fenced accounts separate from their own.
Organisations that can help
P2P platforms are regulated by the Financial Conduct Authority (FCA). Check that that any platforms you’re considering are regulated on the FCA Firm CheckerOpens in a new window
This means that if you have complained to your lender and are unhappy with the outcome – or they don’t respond to you within eight weeks – you can contact the Financial Ombudsman ServiceOpens in a new window (FOS).
A P2P loan is not always covered by the FOS, so it’s important you check.
If the FOS agrees the business has done something wrong, they can instruct them to put things right. The service is free to use.
