P2P Lending: What You Need to Know Before You Lend a Penny

Peer-to-peer (P2P) lending allows you to act as a direct lender to individuals or businesses through online platforms, cutting out traditional banks. In exchange, you earn interest—often higher than standard savings accounts.

It can be attractive, but it’s not without risk. Unlike savings accounts or FSCS-protected investments, P2P lending does not guarantee your capital. For this reason, it tends to appeal more to experienced investors who are looking to diversify their portfolio rather than to those seeking a safe place for their core savings.

What Is P2P Lending?

P2P lending platforms connect lenders (investors) with borrowers—either individuals or small businesses. The platform handles the matching process, credit checks, and repayment collection, usually taking a fee in return.

Some of the best-known UK platforms include:

• Funding Circle – focuses on small business loans
• Assetz Capital – property-backed lending
• Zopa – a pioneer in P2P lending, now operating as a bank

Non-UK Providers

Some other popular provider names outside the UK that you may come across include: Mintos (Latvia), Bondora (Estonia), PeerBerry (Latvia), LendingClub (USA), Prosper (USA). 

But do note that not all of these platforms are available to UK retail investors. Some, like Bondora, may accept UK investors but operate in foreign currencies, while others restrict UK participation due to regulatory reasons.

International P2P investing carries additional risks, including currency fluctuations, different regulatory protections, and less familiarity with borrower markets. It requires careful research and extra due diligence.

How It Works in Practice

1. Open an account with a P2P platform.
2. Deposit funds and either manually choose loans or use the platform’s auto-allocation system.
3. Borrowers repay the loan in instalments, which include interest.
4. You can withdraw repayments or reinvest them.

Typical annual returns range from 3% to 8%+, depending on borrower risk and platform structure.

The Risks You Should Weigh Up

P2P lending is not covered by the Financial Services Compensation Scheme (FSCS). This means that if a borrower defaults—or the platform itself fails—you could lose part or all of your investment.

Key risks include:

• Borrower default — the borrower cannot repay the loan.
• Platform risk — the P2P company goes out of business.
• Economic downturns — higher default rates in tough economic periods.
• Liquidity risk — funds may be locked in until the loan term ends.

Managing Your Risk

• Diversify: Spread your investment across many loans.
• Use reputable, FCA-regulated platforms.
• Check provision funds — some platforms set aside money to cover defaults, but it’s not guaranteed.
• Invest only what you can afford to lose — treat it as a higher-risk investment, not a savings substitute.

Tax and P2P Lending

Interest from P2P lending is taxable. You can offset some of this using your Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate). Some platforms also offer Innovative Finance ISAs (IFISAs), which allow interest to be earned tax-free.

Investor’s Checklist

✅ Use only FCA-regulated P2P platforms when investing in the UK.

✅ Spread your investment across multiple loans to reduce risk.

✅ Research platform performance and default rates before investing.

✅ Consider using an IFISA for tax efficiency.

✅ Approach international platforms with extra caution and assess currency risk.

✅ Invest only as part of a diversified portfolio.

Final Thoughts

P2P lending can be a useful diversification tool for experienced investors seeking returns above those available from traditional accounts. However, it comes with higher risks and no FSCS protection. If security of capital is your priority, there are safer options, such as FSCS-covered savings accounts and investment products. For those comfortable with the risks, careful platform selection—both domestic and international—plus broad diversification are essential.

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Note: All investments carry some degree of risk, so it’s important to understand how your money could be affected. Not all risks are equal—the potential for gains or losses can vary significantly from one investment to another. This article is for general information only and does not constitute financial advice. Always consider your personal circumstances before making any investment decisions.