Peer-to-peer lending explained
The idea of peer-to-peer (P2P) lending is a simple one; you lend money to those who wish to borrow, with a view to receiving a great return for doing so.
What P2P lending companies do is facilitate this process to ensure controls are in place, thus making it a smooth and painless experience for everyone involved.
Anyone who is looking to grow their money will know that bank account interest rates are extremely low, typically around 0.5%. This is due to the low base rate and interest rates; great news for borrowers, but not for those wishing to save.
P2P lending offers an opportunity to earn 10 times this amount in interest on your money lent.
How does it work?
Firstly, decide on how much you wish to lend, and for how long. Your funds could be tied up for up to 5 years, so it’s important to be comfortable with this timescale. Remember, you are lending to those wishing to borrow, and 1-5 year loans are the norm.
Some companies offer the option to withdraw your funds during the loan term. There may be a cost for doing this and you'll have to wait until another lender comes in to replace you, but it is there should you need it. Ideally, though, you want to avoid doing this, as you’ll lose out on the great rate of return!
What are the risks?
It is important to remember that your money is at risk, as, unlike banks, peer-to-peer lenders are not backed by the Financial Services Compensation Scheme (FSCS). However, P2P lenders have taken steps to mitigate this. Lending Works adheres to stringent underwriting processes, and also operates a contingency fund to cover arrears and defaults – known as the Lending Works Shield.
Want to know more about becoming a lender with Lending Works? Check out our lending page or give us a call on 020 7096 8512.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
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