What is peer to peer lending and how does it work?

What is peer to peer lending?

I thought it would be a good idea to make one of my opening blog posts about the whole idea of peer to peer lending. When I first heard about P2P I did not have a clue what it was really about of how to go about getting into it, so i headed off to Google to do a shed load of reading. In the end I found that there was just to much information floating around and a lot of it was very complex and many of the people wanting to get into it were are more than likely new to investing money just like I was. This can make the whole process of taking your first steps very
daunting, something which it should not have to be.
So here I have decided to type out an explanation of what peer to peer lending is about in a way that I wish I could have found it to make it all a little bit less of a challenge to get started.

Peer to Peer lending has been around for roughly a decade now in
one shape or form and was a way to connect potential investors with people who were looking to borrow money in the shape of a loan. By cutting out financial institutions such as banks people who were looking to borrow money could borrow it at a potentially better rate , whilst at the same time people looking to invest or save a bit of spare cash could get a better rate of return than if they put it in a savings account. Early on there were not many platforms to choose from but now as peer to peer lending grows in popularity many new businesses are starting for investors to choose from.
It is worth noting at this point that P2P is not comparable to savings in a bank because there is not the same protection for your money such as the FSCS ( financial services compensation scheme) which banks have, this is an investment after all and is not 100% safe although all loan hopefuls will be credit checked just like they would be if applying for a loan from a bank. Also most platforms will have a debt recovery procedure.

Which peer to peer platform should I choose?

There are so many different providers out there now and each one caters for different types of loans and different customers. Along with this there is such a different varying array of interest rates on offer totally dependant on your appetite for risk. 

For example Ratesetter and Zopa offer lower end interest rates of between 3-7% depending on how long you are willing to lend your hard earned cash out for, they both have a procedure for bad debts such as a provision fund and are relatively safe ( hence the lower rates of interest). Investors can simply spread there money out over a variety of loans to lower the risk more and then forget about the investment if they want to by using reinvest features. Most of the loans on these sites are personal loans made out to people just like you and me.

If you are willing to take a little bit more time out to look after your investments there platforms out there which offer rates of  up to 12% which is an incredible amount when you think about it. My personal favourite at this kind of level is one called Saving Stream. The vast majority of loans are at 12% for your invested money which is then paid out at 1% on the first day of every month. There is quite a bit more risk involved though and you need to make sure that the investment and its securities look water tight. I have found that it is much safer to invest smaller amounts of money onto each loan instead of a lump sum on one loan, dont put all of your eggs in one basket comes to mind.

Should i use peer to peer lending instead of a bank savings account?

In my opinion, no. I believe that there is still a place for cash in the bank after all it is safe and easy to access in an emergency. However I do feel that with interest rates so low at the minute by investing some of your money into peer to peer you will be making your money work for you in a relatively safe way. The compounding effect of the monthly paid interest can mean you build up a big pot after a few years of investment and you are also helping out people and businesses that may struggle to get loans in the conventional way.

As long as a bit of common sense is applied and you do not place all of your money into one loan the risks are quite small. I myself tend to invest small amounts on many different platforms over lots of different loans, so if the worst should happen i will hopefully only lose a very small percentage of my pot.

In conclusion

I hope in some small way this has helped some of you that are thinking about dipping your toes into peer to peer lending. Make sure that you take a little time out to read up on the specific platforms and how they work and start small until you feel a bit more comfortable with the workings of P2P.

Best of luck on your journey.

*This blog post is the authors own opinion and is not and should not be taken as financial advice.