Peer-to-Peer (P2P) Lending Explained

Peer-to-peer (P2P) lending is a form of alternative investment that has been in growing in popularity over recent years.

The offer of inflation-beating returns that are typically higher than traditional investment routes has attracted many investors, particularly experienced investors, and the introduction of the IFISA meant that returns on P2P loans could be earned completely tax-free. 


What is peer-to-peer (P2P) lending?

Peer-to-peer (P2P) lending is an alternative investment that allows individuals or businesses (borrowers) to loan funds directly from other individuals (lenders). 

When it was first introduced, P2P lending’s primary offering was consumer loans. Now, P2P lending has expanded its reach.

The three main types of P2P loan are;

  1. consumer loans
  2. business loans
  3. property loans

How does peer-to-peer lending work?

The process of peer-to-peer (P2P) lending is carried out through an online platform that matches borrowers with lenders, and vice versa. Some P2P platforms allow you to choose who you lend to, while others will allocate your investment on your behalf. 

What are the advantages and disadvantages of peer-to-peer lending?

The major advantage of peer-to-peer (P2P) lending is the inflation-beating, high target returns on offer to investors who are willing - and able - to take the associated risks.

Target rates are often upwards of 6%, which is generally higher than other, more traditional methods of investment. 

Do you pay tax on peer-to-peer lending?

The Innovative Finance ISA (IFISA) - also known as the peer-to-peer (P2P) ISA - was introduced by the UK government in April 2016, and it allows investors to hold P2P loans (and debt-based securities) without paying tax on any returns. 

What is a peer-to-peer ISA?

A peer-to-peer (P2P) ISA is also known as an Innovative Finance ISA (IFISA)

Introduced by the UK government in April 2016, the P2P ISA was launched to further support and develop the UKs growing alternative finance market.

Read more:download the IFISA guide

The P2P ISA allows investors to hold P2P loans and debt-based securities under the ISA tax wrapper, which means there’s no income or capital gains tax to pay. 

Is peer-to-peer lending safe?

P2P lending is an investment. This means that your capital is at risk and returns are not guaranteed - as is the case with all investment products.

However, many investors - particularly experienced investors - may be willing to accept the higher risks that accompany P2P lending in search of higher target returns.