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Peer-to-Peer Lending

Peer-to-peer lending is quite different from opening a savings account.  With peer-to-peer lending you are effectively acting as the bank, with an agency performing the credit checking, risk assessments and administration, for which you pay them a fee.  Bank of John SmithAs the "bank manager" you are able to set the interest rate, but you also assume the risk of the borrower being unable to replay the loan.  You have to judge if your interest rate is competitive, as you are competing with other lenders both inside and outside of the lending platform. There are also complications around taxation.  This site will help explain these differences and the table below will highlight some of the important differences.

Attribute Savings Account P2P Lending
Opening the account Identity check Identity check
Transferring money Cheque, BACS, FasterPayment, CHAPS, Debit Card, Direct Debit, Cash BACS, FasterPayment, Debit Card, Direct Debit
Closing the account Depends on terms and conditions Only when all repayments have been completed or written off
Withdrawing money Depends on terms and conditions Withdraw funds not already lent out, sell existing loans
Security Covered by protection that covers 85,000 of deposits within a single parent company if the bank is unable to repay the money with the Financial Services Compensation Scheme Your money is at risk

Depending on the lending platform you take all or some of the risk if the borrower cannot repay and therefore can loose money

You also take the risk that the company facilitating the payments ceases trading, although some companies have entered into agreements with other parties to continue collections

There is a trade body called the P2P Financial Association that have been setup to ensure high minimum standards of protection for consumers

Taxation Taxed at source at 20% if saver has not registered that they pay no tax

Depending on saver's income, further tax may be required

Not taxed at source, although the UK government is looking at changing this

Depending on lender's income, it is understood that tax would need to be paid on income received after lending fees, but before bad debts (lenders would therefore have to pay tax on loans where they experienced a capital loss)

Lending As a saver you have no knowledge who your money has been relent to Depending on the lending platform, you can either choose who to lend your money to or at least be able to set the interest rate per risk profile
Interest Rates The bank will tell you the interest rate they are offering, expressed as an AER or annual equivalent rate You tell the borrower what interest rate you are offering, expressed as an AER or annual equivalent rate
Total Return The interest you will receive is fixed and therefore the total return is also fixed As you bear the risk (or some thereof) of the borrower being unable to replay the loan, the total return is therefore variable
Queue Savings products are offered on a first come first served basis Lending is performed either as a reverse auction (lowest interest rates win) or as a queue where the lenders offering the lowest interest rate goes to the front of the queue

If there are several lenders offering the same interest rate they are queued by time, with first in first out

Closure of platform If the bank closes you are covered for 85,000 of deposits within a single parent company if the bank is unable to repay the money with the Financial Services Compensation Scheme If the lending platform closes the loans are still valid and enforceable as the lending platform simply arranges them, but you may not have sufficient information to enforce them

Some companies have entered into agreements with other parties to continue collections in the event that they fail

Campaign on taxation of bad debts

There is a campaign started by Zopa forum users on the fair treatment on taxation of bad debts.  There have been some moved by the UK government to change the rules but the details are still being drawn up.