Peer to Peer Lending Guide – Where to Start?
Last Updated on 29th January 2020 by Mark
Below are my thoughts on a good place to start if you are still learning about Peer to Peer Lending. A little history on how I got started with P2P lenders, suggestions on research, what to look for, and what to stay away from.
At the end of the post there are links to information on which lenders I suggest based on your personal strategy. This is not meant to be financial advice as I am not a financial adviser. I’m simply providing my opinions on what I would do if I were starting out. Do your own research until you are comfortable enough to make your own investment decisions. In the end, you are responsible for your own returns, and your own losses.
History – How I Got Started with Peer to Peer Lending
One day, about 5 or so years ago, I was browsing the internet looking for which banks were paying the best interest rates for capital that I didn’t want exposed to the stocks & securities markets. If you’ve spent any time browsing my website, you’ll already know that most of my investments are in assets such as Stocks, Bonds, Gold and REITs. You can read more here about my main Growth Portfolio. Somehow I came across a Peer to Peer Lending reviews site, so I started to explore.
My knowledge was literally zero about this kind of investment. I don’t remember even having heard of it before, however my interest was peaked to say the least when I saw the high return rates being boasted. I spent hour upon hour looking for websites that could give me more in-depth information on if this was a viable investment strategy. How safe was it really? Could I lose my money?
New Investment Sector – P2P Lending
I was excited at the prospect of finding this new investment sector, Peer to Peer lending, however I also found it a little unnerving. Literally hundreds of websites reviewing lenders and boasting about how much return could be made. So many companies out there offing many different types of investments. Many of them wanting to give me cashback or gifts for investing my hard earned capital with them. Offering high interest rates (compared with what I had been getting from banks, where much of my capital was sitting), for what appeared to be just a little higher risk. I spent hour upon hour scouring the internet for everything and anything to do with Peer to Peer Lending. Is Peer to Peer Lending safe to invest my money with? Is it like the stock market? Or a bank? I needed to understand.
So Many Lenders
So Many Peer to Peer Lenders
There were (and still are) so many companies out there to choose from, all vying for our investment capital. So many different types of loans available to invest in. Secured, unsecured, consumer, business loans, loans on cars, airplanes, gold & silver, mortgage loans, pawnshop loans and loans secured by art, wine & whiskey. Just about anything you can think of. All very confusing. It seemed as though I would need to spend the next two years learning about risk, property valuations, amortization, defaults, collections and everything else that banks and credit companies pay experienced individuals to do for them as full time employment.
However I really didn’t want to become an expert lender. I’m retired now and I don’t particularly want to start a new career as a credit & lending expert. It would be great however to find an investment opportunity which would enable me to gain a better return that I was getting from banks, without having to go to school and begin a new career.
Getting My Feet Wet
Getting My Feet Wet
Eventually I became brave enough to place a little capital with some of the companies I had researched and to get my feet wet. Then I studied how they worked, and how the capital grew over time, until I got comfortable enough to try other lenders and increase investments in some of the lenders I had been lending through already. Others I reduced or withdrew capital if it wasn’t doing as advertised.
When initially researching, I think one of the most unnerving things was, with all the hype, I couldn’t really find anyone who was willing to publish their actual results, or even talk numbers. Lot’s saying “I am getting this or that percentage from investments”, but no real numbers. None of my friends or family was investing in P2P, so no help there. I was looking for real numbers, what actual returns were they seeing after all the marketing hype? Was it really such a risky business? How much time and effort was really involved?
After several years of “learning the ropes”, I now feel I have a good understanding of what returns can really be achieved, and what the real risks are. I’ve had so many questions from friends and family who have dipped their toes in the water with P2P that I thought it might be a good idea to start this website. So I started here with a view to giving people who are new to this sector a good insight in to where to start. I publish my actual P2P investment numbers numbers every month, along with screenshots of my actual account balances, so you can see exactly what to expect. You can always see how my P2P investments are doing in my Peer to Peer Portfolio.
Consider Safety Before Chasing High Returns
It’s easy to get excited about companies offering 15% – 20% or more returns on your hard earned capital. Remember this; the level of risk you are taking is typically relative to the rewards you can receive. Look at the lender, how stable are they? Look at the types of loans; secured? unsecured? Who are they lending to? Businesses? Consumers? is the lender profitable? How long have they been in business? Getting 25% per annum return on 10k sounds wonderful, however 7% and being comfortable that you can get your capital back when you need it makes more sense. Being able to sleep at night also counts for something.
Get to Know the P2P Lender
Although it’s not the end of the world if a lender goes broke, because in true Peer to Peer Lending, the loans are directly between you and the borrower. The lender is just an administrator and facilitator. However, if the lender does cease trading, it’s going to cause you some major headaches at best. Who’s going to service the loans to make sure you get your money back? How about collections when a borrower defaults? If the loans are asset secured, who’s going to sell that development property, car or boat so they can retrieve your capital?
Before you place your money with any lender, call them. Ask to speak to the Managing Director or CEO. You may be surprised to find that most of them will be happy to speak with you. Ask them all the questions above, and any others you can think of to help you feel comfortable. Go to the website of the entity that regulates them and see what they say. Don’t send any money until you’re comfortable that they are going to take care of it for you, and act professionally on your behalf.
Get to Know their Team.
Do they have experience lending money? Did they come from a banking background or some other area where they understand how everything works? Do they have a history of collecting on bad debt? You’ll find that many of the more established P2P lenders have decades of experience in these areas, from high level management to the book keepers & admin staff.
Is the Lender FCA Regulated? Or Regulated by Some Others Agency Depending Where you are Investing?
Most of the lenders I invest with are FCA (Financial Conduct Authority) regulated. The FCA is a financial regulatory body in the United Kingdom. It operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The FCA regulates financial firms providing services to consumers and maintains the integrity of the financial markets in the United Kingdom.
Lending through firms that are regulated by the FCA (or some other agency) just gives you another layer of security. It does not mean you can’t lose your money through loan defaults, however it means that fraud by the lender is much less likely. FCA regulated businesses have to adhere to certain standards and levels of transparency.
Ensure You Understand the Loan Types & Terms Offered
Ensure you understand exactly the loan types and terms of the loans you are going to be providing. Who will you be lending to? Is there any asset security? What is the Loan to Value (LTV)? When default happens, how easy will those assets be to sell? Gold, silver or pawn shop items may sell faster than a multi-million pound office block, or a G6 private jet.
Are the loans covered by a “provision fund” that reimburses you if the loans go bad so you can get your capital back faster. Do they have “buyback guarantees” where a lender will buy the loan back from you if it goes in to default. Does the P2P lender have “skin in the game”, meaning do they invest a percentage of their own money in the loan? Is their investment on a “first loss” bases, where they cover the first amount of any capital lost? How long are the loan terms? Is it possible to exit the loans early in the case you need your capital back quickly? Understand everything, in detail!
Tell Me a Story…..
Understand Exactly How Capital is Held
Cautionary Story, about not paying attention……
When I first started investing in P2P, I had read some great reviews on a relativity new lender. How great they were, and how they were offering some huge returns on secured loans. I did a little research and everything I was reading on review sites seemed accurate. So I decided I wanted to get in right away to get some of these high-return loans for myself. I signed up for an account, and found they would accept capital instantly by debit card. So I quickly deposited an amount of capital with them.
Over the next month or so, I noticed that only 4% – 5% of the capital had actually been loaned out. I eventually came to understand that indeed, most of the reviews I had read were honest and fairly accurate, however what wasn’t clear is that these reviews were from people who either had never invested with this company, or the capital they invested was relativity small compared to what I had sent over to lend (and it really wasn’t THAT much). These smaller amounts were lent out easily and the investors/reviewers were happy. Unfortunately, after speaking with the company, it became clear that the larger amount I had deposited to lend was going to take a long time to become fully invested. Diversifying into enough loan pieces was going to be difficult because of the smaller loan book and low new loan flow.
Wait 90 Days to Withdraw!
No problems I thought, things happen, my fault for not doing more research, so I decided to withdraw the remainder of my capital and invest it in a larger, more established company, even with lower returns. When I went to do the transfer out, I then discovered the company had a policy (for genuine anti-money laundering purposes) in which deposits that were made by debit card could not be withdrawn for 90 days! So I was faced with the prospect of funds sitting there in an account, uninvested, and making absolutely no return for the next 90 days.
It never worried me about losing my capital as the company was genuine, well known and FCA regulated. I had not noticed their policy which, to be fair, was displayed on the debit card deposit page on their website. I just wasn’t paying enough attention, being in a rush to get those huge returns.
All Ok in the End
Everything worked out in the end, I got every penny back as the company “bent” their policy for me and eventually agreed to send all of the capital back to my debit card from where it came, but needless to say, I take extra care now when depositing capital with a new lender, so I understand exactly what their policies are about withdrawing capital.
Make sure you understand the rules each lender has about deposits, and withdrawing funds. On my reviews I list all of this information as I understand it, so study them before signing up with a new lender. Ask questions of the lender if you are unsure of anything. How quickly can your money be lent out based on the amount you are going to invest with them? Where does it sit while it’s not on loan? Do they pay interest while money is not on loan? How long will it take to withdraw if you need it in an emergency? Not just exiting loans early, but actually getting your capital out and into your hands.
Spread That “£*^%$*” About!
Diversification – Spread that Capital About!
If you’ve read other parts of my website, you’ll know I call diversification “the prime directive”. It is especially true with Peer to Peer Lending. It would be so easy just to put all of your capital in to a large, well established lender and forget about it. Chances are everything would be ok. Remember though that these investments are not bank accounts. Because the industry is relatively new, no one really knows what will happen when the next financial crisis hits.
We can look at banks and how their lending business has fared historically to get an idea of what might happen. However banks tend to be very large organizations with huge capital backing them, and even if they go broke, the government tends to bail them out. We don’t know how that would work with a P2P Lender though. So make sure you spread your capital over as many legitimate lenders as you can find. And then spread it over as many loans as you can within those lenders. Even if it means accepting lower rates on some of them.
Use Large, Well Established Peer to Peer Lenders
Personally I place more capital with large, well established lenders who publish not only their historical statistics, but also the plans they have for future downturns and recessions (many do publish their “what if” models, see Ratesetter chart below).
However I still diversify in to other smaller lenders, for piece of mind.
The good news is that we do have a little bit of data to fall back on regarding how lenders might fair in the next crisis. The 2008 financial crisis was the worst in recent history. Zopa, even being relativity new lender at the time, made it through relativity unscathed, but we can see from the chart below that defaults soared at that time.
This information is very useful, not only for us, but for other lenders. They look at this data, as well as lending data from banks & building societies to give us an idea of what to expect when the same type of thing happens in the future, so they can prepare for it as best they can.
Here is how RateSetter projects it’s Provision Fund might do under certain scenarios.
Final Note on Diversification
A last note on diversification; In my opinion Peer to Peer Lending should be part of an overall investment strategy. Please don’t place your whole future into any one sector, of any investment type. I suggest only lending money out through Peer to Peer Lending that, in the very worst case, you could afford to lose. It is very unlikely that this would happen, but be safe. Please don’t risk being on the streets if the next financial crisis is worse than the last, because no one knows what will happen. If my P2P investments all went south overnight, it would hurt like heck, and cause me a bunch of problems, but I wouldn’t be on the streets.
Fools Rush In.
Perhaps you read my cautionary story earlier? These days before I start transferring money to new lenders, I typically wait a few days, or at least overnight so I can think about any information I may be missing or not understanding correctly. Don’t be hasty when you decide to invest. Make sure you are comfortable before depositing money with a new lender, think on it for a few days if necessary. If you decide to manually bid on/buy individual loans, as opposed to getting into an auto-invest account, make sure you do your research on each loan, or have a plan to diversify enough so you can take the defaults if you’re loans go souty. Take your time, and don’t feel rushed in to bidding until you are sure you want the loan, then go for it and get the best rate!
Are You a P2P Lending Expert? If Not, Look for Well Established, Respected Companies to Lend With.
How much of a P2P lending expert do you want to become? There are large rewards to be had if you really know what you’re doing when lending out money. If you understand asset valuations and whether or not they are reasonable. Can you look at a company’s financial statements and know if they are likely to be in business for the next 5 years so they can pay back your loan? Do you understand what will happen to a consumer if they lose their job? What career they have chosen, and if they are likely to get another job quickly based on that career so they can continue to pay your loan back?
I can’t, and as mentioned previously, I don’t particularly want to spend the time to learn all of that. I’m a lazy investor. So I look for well established Peer to Peer lenders who have proven they know what they’re doing, then I make sure to diversify between loans. Even with companies like Lending Crowd, I bid on individual loans, but I don’t really know much about the companies I bid on, except for a quick scan to see how long they’ve been in business, and if they’re making money. Maybe a little Googling to see if they have good reviews and their customers like them. Then I just try to bid a small amount on each loan that looks good to me, so that the distribution will pay a good return after defaults if I’m wrong.
There are expert Peer to Peer lenders out there that make a lot of return loaning money. If that’s what you’re looking for, you can probably make more return in the long run, but you’ll need to invest your time studying all of the factors I mentioned earlier to become proficient. I can’t help you with that type of investing unfortunately, but I’m happy with the returns I get from my “lazy” strategy. I maybe spend an hour per month checking on my lending accounts, and that’s only because I publish them here on my website 🙂
So How Much Can I Make?
What Are Realistic Returns? How Much Can I Expect to Make from Peer to Peer Lending, Really?
That all depends on how much time you want to invest per the last section above, and how much risk you are willing to take. If I average out all my Peer to Peer Lending investments, I think about 5% to 7% is a reasonable overall expectation with GBP lenders. In Euros it’s possible to easily make 10% – 15% but they are not as safe as the UK lenders as they are not regulated.
I like to stick with (what I consider to be) the lower risk, low maintenance P2P lenders for most of my capital. I’m happy with that return in this situation. It sure beats the returns the money was getting sat in a bank before I stared lending, and I sleep at night 🙂 That being said, I do have some high-yielding Euro investments, but I typically don’t put a whole lot of capital in any one lender (except for Mintos as they are the largest Euro lender, they are profitable and I trust them). I’ll always identify my perceived risk level of any lender in my reviews.
Tax Free Lending?
Innovative Finance Individual Savings Account (IFISA) & Tax Free Peer to Peer Lending in the U.K.
I am not a tax professional, so I can’t give tax advice. However it is worth mentioning that many of the established lenders support tax free accounts such as an ISA/IFISA. Lending through an IFISA (Innovative Finance Individual Savings Account) can, for most people, make a lot of sense as it can allow interest to accrue on your investments tax free. There are some rules however that can affect money in these accounts and how it can be lent. It can also make it more difficult to diversify between lenders as some lenders have a minimum £5000 investment to invest through an IFISA with them. And the maximum investment in any IFISA is £20,000. Your personal diversification would depend on which lenders you chose, and their loan availability and distribution.
One More Thing about IFISA’s
One thing to note about IFISA’s and distributing capital across multiple accounts. Many people think you can only open one IFISA or ISA per year. However, as I understand it, we are actually allowed to open as many IFISA’s in one tax year as we like. The rule is that you’re not allowed to put “new money” from the current year into more than one of them. So we can open one £20k IFISA and fund it with new money up to £20k. But then open others and distribute capital already invested in older IFISA’s.
So for example, if you already had IFISA’s with Assetz Capital and Growth Street, you could open a new IFISA’s with Lending Works and fund it with “20k, but you could also open new IFISA’s (in the same tax year) with, Kuflink and Loanpad, then move some money from your Assetz Capital and Growth Street IFISA’s into those new accounts in order to diversify your capital across lenders. Don’t forget to use the cashback links on my site if you decided to do it as that can make a HUGE difference in the first year’s returns.
Overall, lending through an ISA/IFISA seems to make a lot of sense, however consult your tax professional before you start to lend to be sure it will be the best option for you.
Move Capital Between Peer to Peer Lenders as Needed
Once you have a relationship with a P2P lender, don’t be complaisant. Keep your eye on their business and any changes they may make. A couple of P2P lenders (Zopa being one of them) have recently found it appropriate to remove their provision funds which cover loans in case of defaults. Opting instead to rely on their understanding of diversification, defaults, credit and collections to provide their advertised interest rates. In my opinion, this change increased the risk factor for Zopa, now with unsecured loans and no provision fund. It doesn’t mean they became uninvestable, it just means things changed so we have to reassess their viability.
Never be afraid to reduce or withdraw capital if the lender changes the terms of the deal.
Peer to Peer Lending is a relatively safe investment if you do your research, and stick with the well known, larger, regulated lenders. It often seems more scary and risky than it really is, providing you take care. Once you’re comfortable, pick a strategy, and get your feet wet. Understand that if your strategy is to chase high returns, you will need to accept more risk, and default losses to get those returns. If you just want to beat the banks, with less effort, just go with the safer Peer to Peer Lenders in my Top Lenders List.
Are You Ready to Get Started?
Once you’re comfortable with everything and you’re ready to go, what is your strategy? Do you want to start with the safer, lower risk lenders? Or are you willing to take a little more risk with some or all of your capital?
I maintain a list of lenders I would use if I were starting out again with Peer to Peer Investing. This list has (what I consider to be) the best lenders for four different strategies:
Individual Lender Reviews
* My opinions, reviews, star ratings and risk ratings are based on my personal investing experience with the company being reviewed. These ratings are personal opinions and are subjective. You should do your own research before investing any capital and not base investments solely on the opinions published on this site.
** Some of the links on this website are affiliate referral links. When you click on these links, I can sometimes receive a commission, at absolutely no cost to you. This helps me to continue to offer new reviews and monthly portfolio updates here on my website. I don’t receive commissions from all lenders and it has no effect on my ongoing opinions on lenders. Income on my investments and capital preservation are my main motivations.
Platforms reviewed on this website I am currently investing with, or I have invested with in the past. You can see with full transparency on my Lending Portfolio Returns page which lenders I am invested with (or have previously been invested with) at any point in time. I am not paid a fee by any of the companies to write reviews, so the reviews are unbiased and purely based on my own personal experiences.
Please read my full website Disclaimer before making investment decisions.