Beginner's Guide to Peer-to-Peer Lending in the UK

Peer review

Peer-to-Peer lending sites have grown phenomenally in recent years with sites such as Zopa and LendingWorks leading the way.

The concept is simple. Rather than leaving your cash to sit in low-interest savings accounts, you can lend it to creditworthy borrowers in the UK who are in search of more favourable terms than those offered by traditional lenders such as high street banks.

Often, you lend directly to individuals so the process is simplied and you pay less money in fees.

The process

The process of becoming a peer-to-peer lending starts with signing up to a provider such as Zopa. You'll need to provide some basic information but once complete you will choose the amount of money you feel comfortable lending and you will also be able to pick terms which match your goals. Usually, the lending process can begin right away.

When you've decided how much you'd like to lend and service will distribute your money - and the money of thousands of other lenders - to creditworthy borrowers up and down the country. The money you set aside for lending will be distributed in small amounts to ensure that the risk you are exposed to is diversified. When your money is on the site, it is best to keep it 'busy' to ensure that it is generating returns at all times.

How do you make money?

When your money is distributed, borrowers will be required to make repayments each month to meet the terms of the loan agreement. You make your returns from a portion of this repayment and it'll appear in your account almost right away. Then, it's up to you what you do with it. You can either withdraw it or leave in there allow it to be reused elsewhere in other loans.

Is Peer-to-Peer lending safe?

There are a few different methods employed by P2P lending services to ensure that you get safe returns on your investments. This is in place to guard against missed payments or complete defaults by the individuals who have borrowed money. Terms are in place which mean that the money belonging to the P2P lending company must be kept separate from the money provided from lenders to make loans to applicants. 

Is it worth it?

The choice, ultimately, is yours but with interest rates still incredibly low, P2P lending is a useful tool to ensure that you get the returns you wish for.