Anyone can become a lender through a peer-to-peer lending company and you can start by lending out a minimum of £10 and there is no maximum on how much you wish to lend out. Peer to peer lending is attractive to deal seekers looking to get a better return than they would through any other savings account. Those looking to lend using joint accounts will not be accepted as only individual accounts are permitted.
If you are part of a business, you may also lend money through a peer-to-peer lending platform provided that your main business is not lending.
The risks involved with lending through a peer-to-peer company are that some of people you lend to may become bad debt and you may not receive the interest rate you were initially quoted. Of course, the company will take various measures to limit your risk by spreading your money across lots of borrowers and carrying out thorough checks but it is important to know that your rate may decrease.
The best returns are achieved by lending to those with bad credit so by choosing to lend to this demographic, you accept that your return on investment may not be as quoted.
To maximize returns you must be willing to lend your money at a fixed rate for as long as five years. By lending for longer, you are showing your commitment to the company and they want to reward you for this. If you wish to access your funds sooner, the companies have a system in place to return your funds within a few working days. However, your interest rate will typically decrease by 1% for withdrawing your money early.
Since the borrowers you have lent to each month are repaying on a monthly basis, you will also receive your return on each month as a form of income. You can decide to withdraw the money each month or relend and you will earn a better rate because it becomes compounded interest.
As the money you are receiving on your savings is classified as income, you are expected to pay tax on your earnings depending on your income band of 20%, 40% or 45%. As of April 2015, there will no longer be tax charged on income made through peer to peer lending which will certainly encourage future lending and borrowing.