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Published 19 August 2022

Advantages and Disadvantages of Peer to Peer Lending

Peer-to-peer lending, whereby borrowers and lenders are matched via websites, known as platforms, offers distinct advantages to borrowers and investors. But it’s important to be aware of the risks involved.

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Until fairly recently, if you needed a loan, the only real option was to talk to a bank or similar financial institution. But today, you can tap alternative sources of funding, including a peer-to-peer (P2P) loan, whereby individuals lend money to other individuals using a website as an intermediary. P2P lending, sometimes called social lending, crowd lending or even crowdfunding, also offers investors an alternative way to obtain a return on their money.

The P2P loan business began in the UK around 2005 and has since lent billions to UK businesses and individuals. The market is now established but is still seen by many as a niche option compared with traditional lenders.

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How does P2P work?

P2P websites bring lenders and borrowers together. If you want to borrow money, you can either submit your requirements directly to one of the many P2P sites in the UK, or use a peer-to-peer loan comparison website, which will search the market to get you the best deal.

Your loan application will be assessed in the same way as an application to a traditional bank. The P2P loan platform will use a credit reference agency to trawl through publicly available information such as the electoral register, and will analyse your financial history to establish your credit rating, or the risk involved in lending to you. If your application is accepted it will then match you with other individuals willing to offer you a peer-to-peer loan.

If you’re interested in investing, in other words, becoming a lender, you can open an account on the P2P website and transfer across the money you want to invest. You may be able to choose the return you’re seeking and split your money across many borrowers, reducing the risk that a loan might not be repaid. Some sites even allow you to bid on loans.

Each platform will operate differently though, and offer different levels of protection to investors so it’s important to do your research to find the right option for you.

Generally speaking, the safer the investment is perceived to be, the lower the rate of return on offer for investors.

Advantages for the borrower

Advantages for the lender/investor

Disadvantages for the lender

Disadvantages for the borrower

Alternatives

If you’re a borrower, you could try a traditional lender, such as a bank or building society, credit union, or in some cases your employer. If you’re having trouble borrowing money from a financial institution, you could ask a friend or relative to act as a guarantor. This means that they’ll be responsible for repaying the loan if you’re unable to do so.

Investors could consider traditional sources of income, such as deposit accounts, stocks and shares based investments, and government or corporate bonds.

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About the Authors

Anthony Beachey

Anthony is a BBC-trained journalist. He has worked in financial services and specialised in investments for over 20 years, writing for various wealth managers and leading news titles.

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Rhiannon Philps

Rhiannon has been writing about personal finance for over three years, specialising in energy, motoring, credit cards and lending. After graduating from the University of Cambridge with a degree in…

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