Peer-to-peer lending or crowdfunding is managed by a sophisticated online platform that matches private lenders with borrowers.
Lenders need to minimise risk and maximise profits, so the problem is working out which platform best meets these requirements.
To help, here’s a run-down of three of the most popular peer-to-peer lending sites – but remember the list is not exhaustive and mentioning them here is no recommendation to use the service.
Private lenders should always research the market and take appropriate, independent and professional advice before entering into a loan agreement or committing any money.
Saying that, peer-to-peer lending is regulated by the Financial Conduct Authority, but lacks any protection from the Financial Services Compensation Scheme or access to an ombudsman if a deal falls apart.
Who are the best known platforms?
Three sites tend to have the largest share of the market:
Zopa and Ratesetter tend to lend to individuals, while Funding Circle specialises in funding for companies and small businesses.
Zopa
Zopa is the longest established peer-to-peer lender and runs like a fixed rate savings account.
The investor picks an initial amount to open the account, and then adds cash to the fund every month. The minimum is £10 and interest payments are paid monthly.
Loans are crowdlended to reduce risk, so a lender’s cash is not tied up in a single deal but spread across several borrowers.
The money is tied up for a year, three years or five years.
Early access is available, but a 1% fee on the total withdrawn is paid by the lender.
The platform has lent £581 million and more than 50,000 active private lenders
Ratesetter
Ratesetter works much like Zopa, but as the name implies, more custom features are available to private lenders.
Instead of taking Zopa’s fixed rate, investors can select a lower or higher interest rate and adjust the lending term to suit their financial strategy.
The downside of this is rates offered by the platform may be slightly lower than those offered by rival platforms.
Funds are crowdlended to reduce risk.
Early access is available, providing funds are available from other private lenders to plug the gap.
Ratesetter has lent almost £300 million and has nearly 13,000 active investors.
Funding Circle
Funding Circle has a focus on lending to businesses.
Instead of setting rates, the platform lets investors pitch a loan amount, term and interest rate to a business and the business can accept the best deal.
Lending to business carries more risk than lending to individuals and the platform is really only for serious and sophisticated investors.
The downside is the Seed Enterprise Investment Scheme (SEIS) may offer a safer and more profitable investment opportunity for investors.
The site quotes a 6.1% average return after fees and bad debts are taken into account.
Funding Circle has 30,000 investors who have lent £320 million
