Is It Safe To Invest in Peer to Peer Lending?

This page was last updated on 1 July 2022

Is It Safe To Invest in Peer to Peer Lending In 2022?

Peer to peer lending allows you to invest your money via a platform to other people who are looking for short term loans.

Using a peer to peer lender or platform, you are able to invest as little as £10 and you could receive returns of 15% per annum (source: Fund Ourselves) based on locking in your investment for at least one year. The returns through peer-to-peer are significantly higher than your average savings account or ISA at around 1% to 3%.

The industry is very mature and well regulated, making it a safe product for both investors and borrowers.

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How does peer to peer lending work?

The peer to peer lender simply acts as a middleman, arbitrating your investment across a pool of other borrowers, who remain completely anonymous to you and should be well diversified given that you are lending to a number of people.

The potential returns can be very rewarding and selected according to your risk appetite, whereby good credit customers offer low returns of 3% or 5%, but take on greater risk with a bad credit customer pool and you could earn as much as 12% to 15%.

With a handful of peer to peer lenders in the UK such as Zopa, Ratesetter and Funding Circle – the industry is worth an estimated £7 billion per year and is largely considered very safe as both a borrower and an investor. 

In the US, Prosper is the most prominent peer-to-peer lender, with their rival firm LendingClub ceasing its peer-to-peer proposition last year. However, personal loans and credit unions are more popular as a way to borrow in the states. 

Is peer to peer lending regulated?

Yes, peer to peer lending is regulated by the Financial Conduct Authority, which means that each lender must undergo a strict authorisation and approval to offer their services. Beyond this, there are very strict measures to ensure that both borrowers and investors are protected and treated fairly and this methodology was updated in 2019.

Is peer to peer lending covered by the financial services compensation scheme? 

No, peer to peer lending is not covered by the financial services compensation scheme, which will not cover you for any losses up to £85,000, unlike other products like banking and credit card losses.

So if your investment is lost due to the provider going insolvent or a huge spell of bad debt, you will not be able to recover your losses through this specific scheme, but rather a provisional scheme that will be offered by the lender.

What happens if my loans are not repaid?

If the loans you have invested in have not been repaid, this should not impact your potential savings rate too badly, since your investment will be diversified across multiple borrowers. 

However, like any other loan product, the lender will have a customer service team to help recover any outstanding debts and there will usually be a provisional fund in place – which is money put aside specifically for redressing losses to investors.

What are the potential risks?

Whilst peer to peer lending is safe, there are always risks, like with any investment.

Your biggest risk is probably the lender going under, bankrupt or falling into administration, which will make your investment void and require a huge provisional scheme to pay you back and this could take years or provide a small settlement. This is possible and has been the fate of some lenders and their investors. 

In addition, if you have a spell of bad debts, this will lower the amount you could potentially earn as interest. Perhaps due to a recession or economic downturn, it would have to take a real hit to lower your returns, but of course, it is always something to be aware of.

Article author

Katy Davies

I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch.   I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.

Outside of work, I love the snow and am a keen snowboarder.  Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.

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