Investment Guides

Advantages and Disadvantages of P2P Lending

Advantages and Disadvantages of P2P Lending
Lily Bridgwood
Written by Lily Bridgwood

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


  1.  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).[1]
  2. 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


  1.  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


  1. 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.
  2. Very High Potential Returns
    These loans have the potential to provide a high potential return, and can even be up to 20%.[2] 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


  1.  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


  1.  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


  1. 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. [3]

Corporate Bonds Advantages


  1.  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.
  2. 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


  1.   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.

Please head over to the OFF3R P2P Lending & Debt channel to compare 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.

[1] https://www.ratesetter.com/
[2] https://www.rebuildingsociety.com/
[3] https://www.fscs.org.uk/what-we-cover/questions-and-answers/qas-about-deposits/

About the author

Lily Bridgwood

Lily Bridgwood

Lily is the Partnerships Associate at OFF3R. She has previous work experience in both the corporate and start-up environments. She joined the OFF3R team in October having recently graduated with First-Class Honours in International Business from the University of Edinburgh.