Peer to peer savings is also known as P2P. Peer to peer lending or crowdfunding is a way to look for high rates of interest as a return for lending your savings to others. Here is a guide on what you need to know before you invest in peer to peer savings.
What is peer to peer savings?
Peer to peer savings is a loan based platform which converts your savings into a lending stream for possible borrowers.
This means that you can lend your money to others for a fixed return, in the similar way that a bank or building society offers loans.
This is how a peer to peer savings works:
- Add your savings to your selected P2P providers’ platform
- Lend your money to a borrower via the P2P provider
- The borrower repays your money back with interest over a fixed term – earning you a profit
You can decide on how long to lend your money for, with terms that are as long as 6 years or as short as 31 days.
However, be careful on how long you tie your money up for, as there are penalties that may be charged for withdrawing your funds early.
How much can you save?
There is no maximum amount to how much you can save so you can save as much as you like.
However, there is a minimum limit on the amount that you have to lend; usually around £10 or £25.
As P2P savings acts like a loan, there is a risk that you may not get your money back if the borrower cannot keep up with their repayments which is known as defaulting.
For this reason, you should always spread the risk by lending your savings to various borrowers.
Higher investments, such as £50,000, can become longer to distribute to borrowers which implies that you will need to wait longer in order to receive a return on all of your money.
Who can you lend your money to?
This depends on the provider that you select. The typical types of borrowers include:
- An individual: this is somebody that is looking to borrow money, who may not have been able to receive credit through traditional methods, for example, through a bank
- A start-up business: Every new enterprise which requires funds for development or expansion in their business
Depending on the need for funds, you may have to wait for a few days or a few weeks until you can lend your money out.
P2P providers will store your money in a holding bank until you can lend it out, with some providers offering a small amount of interest during this time.
Can anyone borrow your money?
No. Borrowers must pass a range of checks to qualify for P2P lending.
These checks are completed by the P2P provider, and these include:
- A full credit check
- An identity check
- An affordability assessment
If the P2P provider you selected is registered with CIFAS, they will also execute an anti-fraud background check on each borrower. They will not perform this check if the provider is not registered with CIFAS.
Which borrower should you decide to lend to?
Individuals are characterised based on their credit history which also has an effect on the amount of interest that you can get in return for your money, broadly speaking:
|Borrowers credit history ||Risk to your money||Your interest rate
Start-up businesses are not classified by their credit profiles so you will have to research the company before you decide to lend to them.
Does it cost you anything?
Yes, most providers will require an annual servicing fee of about 1 percent. This is deducted from each repayment before it gets to you.
If you decide to withdraw your savings during a fixed term, you will be charged with a sale fee; this is normally around 0.25 percent. The sale fee includes the costs of looking for a new investor to put in the amount that you take out of the fixed term loan.
If you decide to withdraw your money at the end of an agreed term, you will not be charged.
Do you pay tax on P2P savings?
You pay for tax on P2P savings. However, your provider will not automatically subtract any tax from your interest, unlike building societies or banks.
You will have to declare any P2P savings interest that you earn by accomplishing a self-assessment form at the the tax year’s end.
Can you make use of your ISA allowance with P2P savings?
Yes, if you have an innovative finance ISA, you can save into a peer to peer investment with the use of your tax-free ISA allowance.
This means that the interest that you earn will be tax-free and that you will not be required to accomplish a self-assessment form for any ISA money you have used in P2P savings.
When will you get your interest?
You will get your interest usually at the end of the lending term that you have chosen. However, this depends on whether you lent your money on a rolling term basis or a fixed term:
- Rolling term: A portion of your capital and interest, every month for a set term will be paid to you. This means that you can re-invest or withdraw your monthly capital repayments after each month if you want to.
- Fixed term: You can lend your savings for a fixed period, for example, one year, and you get your capital back at the end. You can also decide to have any interest given to you on a monthly basis.
Where to invest in peer to peer savings?
It is only an online savings platform, and every provider has its own methods of operating.
You should analyse all of the P2P savings and investment providers to look for the one which will offer you the best return on your savings.
To start saving, you must register on the website of your chosen provider, add your savings, then from a list of borrowers, select who to lend your money to.
Will your peer to peer savings be protected?
There is usually no protection under the FSCS, which means that you would possibly lose your money if you save via a provider who fails.
Some P2P providers have their own schemes which will cover your savings if a borrower default on their payments.
These schemes include a definite amount of money to cover any default payments. If a huge amount of borrowers default at the same time, the scheme may not have adequate money to cover the entire loss to each investor, meaning that you could lose your money.
Make sure that you check the details of any scheme proposed by a provider before investing your money.
Is peer to peer savings regulated?
Yes. Since April 2014, peer to peer providers are regulated by the FCA, which means that every provider has to comply with the terms that are listed below:
- Your money must be protected by providers that are meeting certain capital requirements
- Be clear and transparent regarding the risk and who are to borrow your funds
- If their platform collapses, providers must have plans in place in order to collect your money
You can check if a peer to peer company is regulated by looking for their name on the FCA register. However, being regulated does not mean that they are covered by the FSCS.