P2P lending is a broad category that covers a variety of different investments. However, at the most basic level, all P2P loans are similar: you, the investor, deliver money to one or more businesses or individuals, who then pay interest on that money, returning the initial loan at the end of the term.
The different types of P2P lending vary significantly, so it is essential that you understand how they work and which you are investing in. We will outline the advantages and disadvantages of the different types listed below:
- Account-Based Products – Your money is spread across loans to many businesses or individuals.
- Self-select Investments – You choose to lend to a specific
- Innovative Finance ISA – Your P2P loans are wrapped in an ISA.
- Corporate bonds – Loaning money to large, listed companies.
Account-Based Advantages of P2P Lending
- Low Risk, Excellent Reputation
The reputation of account-based products is extremely good. Many of the bigger platforms can genuinely claim that none of their investors have lost money (because they cover the cost if investments fail).
- Good Potential Returns
Considering their reputation, high level of credibility, and good track record for low risk, the investments could provide a good potential return; the 4-7% you receive is significantly higher than you’d receive from a savings account.
Account-Based Disadvantages of P2P Lending
- Fees Apply To Exit Early
Some platforms don’t give you the option to exit early, and those that do often charge a fee for you to do so. Often you can only exit if the platform can find other investors to take over your share of the loan. It is best to invest when you are sure you won’t need to exit during the minimum duration of the loan.
Self-select Advantages of P2P Lending
- Investing In A Business You’ve Chosen
Unlike account-based loans, investing directly in a business allows you to compare and choose from several businesses. If you’re confident that you can pick out good investments where the return outweighs the risk, this could be a profitable investment.
- Very High Potential Returns
These loans have the potential to provide a high potential return, and can even be up to 20%. They are often quite short, typically lasting for 12 months, so you can potentially receive your initial loan back quite quickly (unless the business fails).
Self-select Disadvantages of P2P Lending
- Very High Risk
That potential high return is offered because you are investing in small businesses with a very high risk. It is highly likely that you could experience some failure if you invest in these products.
Innovative Finance ISA Advantages
- Tax Efficient
Normally, interest received through P2P lending is added to your taxable income and taxed accordingly. The IFISA wraps up your P2P lending in a tax-free bubble, so any interest you receive is tax-free.
Innovative Finance ISA Disadvantages
- No FSCS Guarantee
Cash ISAs are protected by the Financial Services Compensation Scheme, which means they are underwritten by the Government up to a value of £75,000. P2P lending is not governed by the FSCS and so does not benefit from this guarantee. 
Corporate Bonds Advantages
- Relatively Low Risk
Bonds tend to be considered lower risk for two reasons.Firstly, the businesses issuing them are large, established companies. This does not mean they can’t fail, but the amount of public information available about these businesses does mean you can make your own assessment.Secondly, in the event of bankruptcy, bondholders are paid before shareholders, which makes a bond a safer investment than shares in the same company. However, the company must first settle with other creditors, including banks, so this doesn’t mean you’ll see your money back.
- Good Potential Return
Corporate bonds can typically provide a return of around 6% gross interest per annum, although the potential return varies depending on the business.
Corporate Bonds Disadvantages
- Potential Credit Risk
Whilst bonds do tend to fall at the lower end of the investment risk spectrum there is still the potential for credit risk. Should the corporate bond issuer go out of business, investors must be aware that they may not get their investment back or receive interest payments.
Compare Peer-to-Peer Investments
Below are a list of Peer-to-Peer investing platforms available on OFF3R:
|Goji’s Diversified Lending Bonds allocate funds across selected lenders to diversify investors across a number of platforms, loan classes & secured loans. Aiming to generate attractive returns whilst mitigating credit, platform & investment risk.||Go to Site|
|Assetz Capital is a provider of alternative funding sources to SMEs and property developers. They provide access to a network of High Net Worth individuals to provide businesses with the loans they need.||Go to Site|
|Landbay is a peer-to-peer investment platform that provides lenders direct access to fund the mortgages of buy-to-let properties in the UK.||Go to Site|
|LendingCrowd is an award-winning peer-to- peer lending platform that matches investors with UK small and medium sized businesses (SMEs) seeking business loans.||Go to Site|
|Lending works is an online consumer peer-to-peer lending platform which matches shrewd lenders seeking better returns on their money with creditworthy borrowers looking for good value, hassle-free personal loans.||Go to Site|
|Proplend P2P connects investors directly to corporate borrowers via loans secured on property.||Go to Site|
|Crowd2Fund is a directly regulated FCA peer-to-peer lending platform. Investments have a pre-defined interest rate which is clearly shown, between 6% - 15%, averaging at 8.7% APR.||Go to Site|
|ArchOver is a Peer-to-Peer business lending service, connecting businesses requiring finance with investors seeking a secure and favourable return. To date, they have facilitated over £40million of funding for UK businesses and delivered Lender returns of up to 9% p.a.||Go to Site|
|Money&Co. is a P2P business lending platform that allows individuals, family offices or institutions looking for a better rate of interest on their cash to lend to small businesses that need to borrow in order to grow.||Go to Site|
|Growth Street’s marketplace aims to provide investors with a simple way to potentially earn a decent return. Investors can lend any amount from £10.||Go to Site|
|Lending to a diverse range of creditworthy borrowers including: individuals, small and medium sized businesses, property developers and other lending businesses. RateSetter.com is a peer-to-peer lending website enabling lenders to get fair returns while cutting the cost of borrowing.||Go to Site|
|A chance to invest alongside an experienced investment company, Octopus, in its own property-backed loans. £10 minimum. Quick and easy. No fixed term.||Go to Site|
Please head over to the OFF3R Peer-to-peer Lending channel for a more detailed comparison of the latest opportunities.
Risk Warning: Investing in or lending to early stage businesses involves a high level of risk, including illiquidity (inability to sell assets quickly or without substantial loss in value), lack of dividends, loss of capital and dilution risks and it should be done only as part of a diversified portfolio. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Your capital is at risk.