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Sunday, 5 July 2015

How to get started with Peer to Peer Lending

I started my Peer to Peer Lending (Prending) journey with ZOPA and Ratesetter around 18 months ago – both platforms are relatively easy to understand.  Zopa currently pays 5% on the 5 year market (ie the loan is for 5 years).

Ratesetter allows you to bid for the rate you want.  The Ratesetter 5 year market rate is typically 5.5% to 6.5% per annum.  Rates will be lower if you choose a shorter loan period.  The current Ratesetter one month rate is 2.7% per annum (but still much better than any bank!).  Please note that the higher the rate you bid for, the longer you will have to wait for your money to be invested.


Note that the links above for ZOPA and Ratesetter are both promotional links.  If you click on one of them and join the platform and then subsequently lend £1000, you (and I) will currently each receive a gift of £25.  However, these sites are easy to locate via Google if you don't fancy the £25!

How do these platforms work?

Both sites allow you to choose how much to invest.  The minimum loan size on both sites is £20 so there is virtually nothing to lose in giving them a punt.  The borrowers on these sites are generally private individuals and your money will be shared out across a number of loans in order to spread the risk.

However, both sites have a contingency fund that should cover the costs of any defaults so the rate on offer is what you should actually get.  Both sites are pretty ‘hands off’ and you can check online at any time to see how your lending is going.

The loans on these platforms are in the form of Amortised Loans .  This means the borrower makes equal payments throughout the lifetime of the loan.  In practice this means the interest owed is returned each month together with a proportion of the capital. 

Let us assume that you made a single loan of say £1000 at 5% over a period of one year.  Half way through the loan, around half of your money would have been returned to your holding account.  This means the amount of interest being earned is continually reducing.  Only the money on loan is actually earning interest.

If you want to earn the full 5% then you need to constantly reinvest the money returned.   Fortunately these sites allow you to automatically reinvest returns although you can switch this off and ‘hold’ returned capital and/or interest.


This relative ease of access to your money is known as liquidity.  Assets that can be easily bought or sold are known as liquid assets.

With sites like Zopa and Ratesetter, if you need some of your money back then you can switch off the auto-invest facility and transfer the resulting cash in your holding account to your bank current account.

I will return to the subject of liquidity and accessing your lent money again as we look at other more complicated platforms and how they handle different types of loan such as interest only loans.

What next? 

My advice is if you are still interested, then why not get your feet wet and try one of these sites?  It only takes a few minutes to sign up and then transfer a small amount of money onto the platform (typically via a bank card or bank transfer).

Note: that although these sites are pretty safe and are regulated by the Government, your money is not yet covered by the Government’s Financial Services Compensation Scheme (FSCS).  This currently pays up to £85,000 should your bank fold with the result that your savings are lost. 

However the Government does lend to small business using peer to peer platforms and the Chancellor is supporting PtPL by, for example, allowing them to be included in Self Invested Personal Pensions (SIPPs).

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