Peer-to-peer lending

What it means

Peer-to-peer lending is borrowing in which individuals or companies lend money to others through an online platform without a bank in the middle. The platform matches investors with borrowers, assesses applications, administers repayments and charges fees to both sides.

For borrowers it is an alternative to a bank loan, often with faster approval. Investors earn more than on deposits but bear the risk that the borrower defaults. Money on a platform is not protected like bank deposits, and if the platform runs into trouble, getting funds back can take a long time.

Lending platforms for business projects fall under the European crowdfunding rules, which require authorisation, a key information sheet for each project and a knowledge test for non-professional investors. Consumer loans between individuals are additionally subject to consumer protection law.

How it works in practice

A sensible investor spreads the amount across many small stakes in different loans so that one default does not wipe out the return. Interest should be seen as payment for risk: a high interest rate usually signals a weaker borrower, not a bargain without a catch.

For an individual, interest from P2P loans is taxable income to be declared in the tax return, as platforms normally do not withhold tax. A loss on an unpaid loan cannot always simply be offset against income, so it pays to keep a record of every movement.

A company borrowing through a platform should compare the total cost including platform fees, not just the advertised rate. Repayment behaviour is usually reported to registers, and late payment can hurt the chances of obtaining bank finance later.

What to watch out for

Before investing, check whether the platform is authorised and who supervises it. Promises of guaranteed returns or buyback of loans are only as strong as the platform's own finances and may not hold if it fails.

Investors should expect low liquidity. Money is tied up until maturity, and an early sale on a secondary market, if one exists, usually comes at a discount. Only funds that will not be needed for a long time belong in P2P lending.