Peer-to-peer lending firms: Moneywise's top picks
Peer-to-peer (P2P) lending has exploded since Zopa pioneered the service in 2005. Since then, 150,000 people have lent about £5.8 billion through P2P platforms. Between April and June this year alone, £658 million was lent, according to the Peer-to-Peer Finance Association.
The growth of the sector is easy to understand. Investors are attracted by returns that dwarf the 2% you might get from a savings account if you’re willing to lock your money away for several years. A cautious investor might expect returns of 3.5% a year, while someone who’s willing to make riskier loans could comfortably grow their money by 6.7% a year.
While these potential returns compare very favourably to savings accounts, they’re not directly comparable as there is a lot more risk to the saver. And you do need online access to participate in the sector.
What is P2P lending?
P2P websites pair savers with borrowers, acting like middlemen in that they offer a place for the two groups to come together and agree lending arrangements.
This means savers are in effect ‘lenders’, lending their own money (in the shape of a deposit) to those who wish to borrow; and getting a return on their money from the loan rate charged to borrowers (this loan rate is cheaper than the rate offered to borrowers by high street banks and building societies – otherwise borrowers would have no need to visit a P2P lender in the first place).
What protection is there for my money?
Traditional savings accounts are guaranteed by the bank or building society, which is in turn guaranteed by the Financial Services Compensation Scheme (FSCS), which protects deposits up to £75,000 per person, per deposit taker. If someone takes a loan from the bank and ‘defaults’, in other words falls behind on their payment, usually by 45 days, then the bank takes the hit instead of its savers. For more on this read How safe is your bank?
No such protection is afforded to P2P investors. If a borrower doesn’t pay back their debts, most P2P companies pass that loss directly on to the investor. However, many sites mitigate against this with a ‘provision fund’ – essentially a proportion of all repayments are pooled in a back-up fund that’s used to cover payments in default.
The fact P2P investments aren’t covered by the FSCS is another reason potential returns are higher for investors. Though it’s tempting to think of the FSCS as free insurance, it isn’t. The scheme is funded by a levy on banks and building societies, eating into high-street interest rates. As P2P companies aren’t covered by this scheme, they don’t need to fund it with investors’ interest.
That said, there is limited protection for some P2P investors through the lesser-known FSCS for investments. It doesn’t cover investment losses directly, but protects people who were inappropriately sold P2P investments by a qualified financial adviser.
An FSCS spokesperson explains: “An investor may be able to claim up to £50,000 from FSCS if various conditions can be met – they received the advice after 6 April 2016; they lost money as a result of that advice; the firm giving the advice was authorised to do so by the Financial Conduct Authority; and it is no longer able to meet claims for compensation.
The claim will also need to satisfy Financial Conduct Authority (FCA) rules on P2P agreements.
“While FSCS doesn’t provide compensation for loss caused by bad investments, people receiving advice on peer-to-peer agreements now benefit from the same protection from us as for advice regarding other authorised investments.”
Are some P2P firms riskier than others?
Andrew Bailey, head of the FCA, said in June he was “pretty worried” about P2P, specifically that some consumers wouldn’t appreciate returns could be eroded by bad debtors.
This is crucial. The figures we quote on these pages are expected returns after losses have been deducted, but they are by no means guaranteed and you could lose some or all of your capital. If that scares you, stick to savings accounts.
Though P2P lending is inherently riskier than saving in a bank or building society, some firms are riskier than others. The most important factor is how well these companies can screen out uncreditworthy borrowers, says Neil Faulkner, founder of independent P2P analyst 4th Way.
“The biggest thing by a long margin is the talent and experience of the teams,” he says. “You need to convince yourself that the company has relevant banking experience within its field of lending.”
Check out what a firm says about its key staff and their experience on its website. You can also compare lenders by the relative risk of the types of borrower they serve. Some companies lend to consumers, others to businesses, or property developers, while some companies lend to a combination of all three.
Consumer loans are generally seen as the lowest risk, due to the amount of information available to the P2P companies from credit rating agencies. Business loans are riskier, as less information is available, and property firms are intrinsically the riskiest.
But comparing borrowers is only one factor when judging the risk of a P2P company, and the structure of the loans can also make some riskier than others.
“If you look at property, for example, investments receiving rent are generally lower risk,” explains Mr Faulkner. “If there’s a big balance due at the end [with an interest-only buy to let investor, for example], then it’s at the higher end of the risk spectrum.”
And a £10,000 loan to a “risky” property development company might represent little actual risk if it’s secured against a plot of land worth £1 million.
So do potential P2P returns justify the higher risks? Mr Faulkner thinks so: “I’m very excited about P2P as something with an excellent risk- reward balance, somewhere between stock market investments and savings."
Have investors lost money?
To date, there have been no high-profile P2P failures in the UK, but a few hundred investors were burned by niche lender Quakle in 2012, caused by the company lending too much to poor quality borrowers.
Further afield, Swedish P2P lender TrustBuddy collapsed in October 2015. TrustBuddy sat at the riskier end of the market, offering 12% interest via high-risk unsecured personal loans. It emerged the company had adopted Ponzi-style practices, using money from new investors to service existing bad debts, according to the firm’s statement “in violation of [lenders’] instructions or without their permission”.
Investors in TrustBuddy faced losing at least 25% of the money recovered in liquidation, to say nothing of the millions that weren’t recovered.This story reminds everyone of the golden rule of investment: if something sounds too good to be true, it probably is.
Moneywise P2P recommendations
Below is our round-up of 14 of the main P2P firms in the UK. We’ve ranked them from those we trust the most and are suitable for beginners, to the higher-risk companies, to those we think are best avoided. We’ve also summarised the key features of each firm in the table below.
If you find another, or would like to share your experiences, contact Moneywise at firstname.lastname@example.org.
(Click on the table to enlarge)
Moneywise top picks
Start with one of these three companies – they have been recommended by Moneywise readers and have good protection in place.
Zopa lends exclusively to consumers, paying 3.5% to 6.7%, after the impacts of bad debts have been deducted. The lower returns than you’ll find elsewhere reflect the fact these loans are exclusively relatively low-risk consumer loans.
Most Zopa investments are covered by the ‘provision fund’, which pools a proportion of all repayments to cover losses from bad debts. Zopa’s provision fund stands at £13 million, which comfortably covers the number of people it expects to default and then some. People who invest in Zopa Plus, the riskiest type of account, aren’t covered by the provision fund, but
can expect higher returns.
Zopa’s lending record indicates lots of happy customers. Some 53,000 of the 63,000 people who have lent via Zopa are still doing so. Zopa won the Most Trusted P2P provider in the Moneywise 2016 Customer Service Awards.
LendingWorks mainly lends to consumers, typically issuing loans of a few thousand pounds to be repaid over three years. A tiny proportion (less than 1%) of loans are made to small traders.
It claims a unique three-line defence for investors. Alongside the usual careful screening and provision fund, which contributes to defaults under 1%, it also insures investors against fraud, cybercrime and defaulting borrowers, both on a small and large scale. The insurance policy is underwritten by three major UK insurance companies, each with balance sheets of more than £2 billion.
Potential returns after defaults: 4.7% over three years, 5.7% over five years.
LendingWorks was awarded Best P2P Platform for Savers in the Moneywise 2016 Customer Service Awards.
RateSetter predominately lends to consumers, with some unsecured loans to small businesses and secured loans for larger firms and property developers. After bad debt, actual returns range from 3% to 5.8% a year.
In June RateSetter started branching out from lending to consumers, starting offering loans between £25,000 and £1,000,000 to small businesses.
The site has recently rebutted questions about its default rates, which it admits were higher than expected for a period in 2014 while the service was growing rapidly. In light of this, the site has slightly changed how its provision fund works. RateSetter says that to date, no investor has lost money using the service.
RateSetter won the Moneywise 2015 Customer Service Awards for peer-to-peer platforms.
If you are investing a lot of money and would like to move beyond the three providers recommended by Moneywise readers, or are investing more money and would like to spread it around further then these companies are worth checking out.
AssetzCapital is one of the more complicated P2P providers, and investors are free to pick their lending opportunities if they want to. Unless you want to get really involved that won't be appropriate for first-time peer to peer lenders, so it's better to start with one of the "fund" style options.
Money is lent to small businesses, property developers and buy-to-let investors.
Most of the ready-made options are covered by a provision fund, though this will lower your overall returns.
If you do want to pick your own investments, loans are generally secured with repayment periods between three months and five years. The devil is in the detail here – some are repaid monthly, while others are interest-only until the loan matures, generally seen as riskier.
AssetzCapital anticipates default rates of 5.75%, which it says are typical for small businesses. Its credit assessment seems stringent as to date the actual losses from bad debts are much lower.
AssetzCapital's investors have lost no money through the provision-covered funds to date, though they could in future. Its 30-day notice account will pay 4.25% a year, providing bad debts continue to be covered in full by the provision fund.
LendInvest solely lends for property purchases. The average loan size is £550,000, far more than a typical consumer loan. However, loans are always secured against properties, and the average loan to value is 57.3%, offering plenty of assurance to lenders.
LendInvest has a few more borrowers classed in arrears (at least 45 days behind on repayments) than Zopa or RateSetter, at 0.14%. With the interest rates it charges, borrowers have earned 7.22% on average, after fees and bad debts.
This platform offers a high level of transparency to investors, who can view the company’s entire loan book on a monthly basis.
FundingCircle.com is the UK’s largest P2P platform for business loans and it also provides property finance. Investors have the option to pick who they lend to directly or automate the process. Using the ‘Autobid’ process, loans are split between at least 100 companies.
FundingCircle says everyone who has used the Autobid process has made money so far, with typical returns of 7.1%. People who lend to just 10 companies get a bumpier ride, though only 0.1% of these people have lost money so far. Average returns are still around 7%, but 3% of lenders achieved double-digit returns.
Overall, FundingCircle’s bad debts stand at 1.7% of its loan book, or £24 million. Providing borrowers diversify widely and pick several investments, interest payments ought to cover any losses from defaults.
Wellesley & Co pools all investors’ money when issuing loans to borrowers, so investments are diversified widely. Unusually, it puts its own cash alongside investors’, suggesting it is confident in its credit decisions. Money is lent to businesses and consumers and all loans are secured, with a 69% average loan to value.
Returns are fairly conservative, ranging from 2.95% to 3.7%, depending on terms. Rates aren’t guaranteed, but investors have suffered no bad debts to date. The platform anticipates 1% losses from bad debts a year.
MarketInvoice specialises in invoice financing, which is akin to payday loans for businesses, letting companies borrow against yet-to-be-paid invoices.
To date, investors have earned 10.65% interest after deducting losses from bad debts. Around 2% of loans had problems, though most of this money was repaid late, rather than lost. The higher rates charged on these business loans more than cover losses from bad debt. The platform has a £50,000 minimum investment, which rules out this option for most investors. Even if you’re keen on getting into P2P, it should only be a small part of your portfolio.
LandBay allows P2P investors to back UK property purchases. Its provision fund is worth 0.6% of all lending, and it expects defaults of 0.1%. To date, there have been no defaults so the provision fund is running at a surplus. It advertises returns of 3.5% to 4.4%. The £42 million lent through the site is backed by properties worth £63 million at an average loan size of £167,623.
These firms aren’t suitable for most investors. However, if you do your own further research, and are comfortable with the risks, they offer the potential for higher returns.
LendLoanInvest is a ‘raw’ peer-to-peer service that lets lenders bid directly to lend to consumers. This is potentially very risky as you have limited information about the borrower but are expected to set the rate. Lenders are encouraged to spread loans around, but with the standard service this must be done manually.
This is only suitable for people who really understand what they’re doing, though the site automatically screens out borrowers deemed too risky.
Potential returns: 3.5% to 7.8% after fees have been deducted, but this does not include defaults (expected: 1.5%)
ThinCats has paid investors 9% interest on average by lending to businesses.
The site runs two auctions for business loans, either first-come-first-served at a set rate, or one where lenders can bid the rate they’re willing to lend at. Losses total 2.1%, but defaults have reached as high as 14.9% for those made in 2012.
Given these are business loans, and lenders can set the rates they offer businesses, this is one that’s better geared to more experienced P2P investors.
The following companies have serious question marks over them:
Rebuildingsociety.com is the smallest peer-to-peer provider in our roundup. It links personal investors with businesses looking to borrow.
The platform claims average gross yields of 8.4%, but doesn’t say what actual returns investors can expect after factoring in bad debts.
As with LendLoanInvest, money is lent through an auction process so lenders need to bid on the rate they’re willing to accept on their loans. That’s simply not appropriate for most people, who won’t be able to accurately judge the risk of a default, let alone the rate they should charge to reflect that risk.
Quidcycle promises an alternative source of loans for troubled borrowers, but that potentially means more risk for investors too.
In March, Moneywise spoke with Frank Mukahanana, the company’s then chief executive, who explained the company aimed to offer loans at rates of 6% to 10% to help people struggling to pay off credit card debts incurring 30% interest or higher. Despite being selective about which borrowers it takes on, at the time the company’s default rate was well above target, though losses were fully covered by the company’s provision fund at that time.
At the time of writing, Mr Mukahanana has left Quidcycle and the company now refuses to disclose how much money has been lent to date, the returns achieved by investors or the company’s default rate. Lenders beware.
FundingKnight has had a troubled year, falling into administration and putting 900 savers’ money at risk. Since then, the company has been bailed out with a £1 million injection from GLI, an investment firm with both an interest in the company and one of its lenders. GLI says that all investors will be able to get their money back.
The company lends to UK businesses and offers bridging loans for property, which are large, short-term loans. The platform advertises rates of up to 12%, but as of the end of July, net returns are 8.79%. Loans are issued with repayment periods between six months and five years, with loans between £25,000 and £1,000,000.
Risk-averse lenders will be put off by the company’s recent issues.
Questions to ask before investing in P2P
- Is the company registered with the FCA? Most P2P companies operate under “interim” status as they are going through the approval stage. They should still appear on the Financial Services Register at FCA.org.uk
- Does the lender have a good track record of managing credit risk? What experience does it have?
- How does it manage risk? It should either focus on high quality borrowers, or secure loans against quality assets (loans secured against properties should be at a low loan-to-value, for example)
- Is investment performance transparent? If you can’t find returns to date (after defaults), total money lent and default rates be very wary.
- Are the returns high enough? Better rates than a savings account aren’t enough – they need to be substantially higher to justify the extra risk.
- Are the returns low enough? If a site offers returns much higher than everywhere else, it’s probably too good to be true.
- Do your investments get spread around? Favour sites that let you split your money between borrowers. If you’re investing a lot, split your investment across multiple P2P sites.
- What does it cost to access your money? Some platforms require you to sell your investment to another person, and if market conditions are poor you might need to sell at a loss.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).