FAQs

Peer-to-peer lending, also called “social lending”, “marketplace lending”, “ethical lending, “democratic finance” and “crowdlending”, allows you to earn an income and make money by helping other people or businesses to get out from the grasp of the banks.

You open an online account with one or more P2P lending companies, and then you can lend money to others. By cutting out the banks in this way, you receive more interest than you’ll get in savings accounts. Borrowers can pay lower interest rates than the banks will charge them, or they can be treated better and get better terms and conditions.

There are many types of peer-to-peer lending: lending to fund property developments, lending to individuals, lending to small businesses, lending to landlords, and more.

In most countries, “peer-to-peer lending” is not a regulated phrase and so how the lending is legally structured can mean different things in different countries – and also to different people within a country. It includes several legal structures across Europe. But it's all just part of the bigger lending space of online direct lending.

Two criteria establish whether you're doing online direct lending.

The first is simply that you're lending through a lending platform that you access through a website or an app. (That's the “online” part.)

The second is that you are either lending directly to all the end borrowers, or a legal structure is in place to effectively achieve the same. The point is that this greatly minimises the risk that, if the provider goes bust, you would have to pay for their debts from your profits or from the money you lent.

So your outstanding lent money can be ringfenced to be paid back to you, and only you. (That's “the direct lending” part.)

• Millions of people have been lending through lending accounts and the vast majority have made money across Europe. We believe that every single lender who has followed all 4thWay's key guidance will have made a profit.
• This type of investing has made remarkably stable profits every year in a large number of countries since it started in 2005, after bad debts and costs. In contrast, one-in-three years have been down years for stock-market investors, when you take all their investing costs into account.

But low risk is not no risk, so you must do your research to understand what you're doing. For an excellent start, read our core lending guides.

Each peer-to-peer lending company (or other online direct lending company) works differently, sometimes dramatically so, but here’s how one of the most common models work:

A person or company wants to borrow some money. For example, it could be your neighbour looking to buy a car, a business person looking to grow her business, or a local landlord or property developer looking to make the next acquisition or renovate.

The prospective borrower gets in touch with a peer-to-peer lending company, because it probably offers better service, interest rates, or terms and conditions than the banks.

The P2P company does a thorough check of the applicant, rather like how banks do. In this case, the loan is approved and the interest rate agreed.

Then, you and other individuals lend your money to that borrower to fund the loan, with €50 lent by you, €10 by someone else, a third person lending €1,000, and so on.

You might choose your individual borrowers yourself or allow the P2P lending company to automatically allocate your money into different loans.

As lenders receive repayments and interest, most decide to re-lend. Lenders might also buy existing loans from other people to spread across more loans more quickly or to take part in especially attractive deals.

(We're using euros for reference, but some lending is to borrowers outside Euroland and completed in other currencies.)

Peer-to-peer lending pays you many times more than savings accounts, yet with lower risk than the stock market even when you commit your money for less time. Read more in Peer-to-Peer Lending Vs Other Investments.

Each country has different tax rules, so here's an outline of just how varied it can be.

Normally, you'll be paying income tax in your own country on the interest you earn after bad debts. You can usually – but not always – offset any losses you make in one lending account against gains you make in another, in order to reduce your tax bill.

Depending on both the country and how the lending is legally structured, you might sometimes instead pay a capital gains tax on some interest you earn.

Rarely, you might have to pay tax in your own country on profits you make in the event of selling your loans for more than you paid for them. The tax you usually pay here is a capital gains tax.

Sometimes more taxes apply if you're buying second-hand loan parts from an existing lender than if you're one of those lending the money in the first instance.

A few countries take a withholding tax. This means they deduct a tax to be paid to the country the lending company is based in before sending you what's left of the income you earned. Particularly for overseas investors, it's not always possible or easy to recover that money. Sometimes you may be able to reduce taxes through a double-taxation treaty.

Some countries offer their residents a certain amount of tax-free returns and these tax advantages can be very generous.

You can lend to both individuals and businesses. You can lend to prime, low-risk borrowers, or to high-risk borrowers, and anything in between.

With dozens of P2P lending companies to choose from, the types of loans are expanding rapidly:

• Mortgages and short-term loans to landlords, property owners and property developers.
• Small business loans.
• Personal loans.
• Infrastructure loans (such as lending against energy projects).
• Loans against personal property (such as pawnbroking or taking rich people’s yachts as security).
• Loans against business invoices (where you pay businesses who are owed by their customers, and they pay you back plus interest when the customer repays.
• Loans against business assets, such as machinery or farmers' crops.
• Payday loans.
• Loans to fund legal cases.

Some providers will let you lend as little as €10 spread across 100+ borrowers. Others require you to invest at least €10,000 in each loan you want to take part in. But most are around the €20 to €100 per loan mark.

Theoretically, you can lend as much as you want, provided there are enough quality borrowers willing to pay fair interest rates.

(We're using euros for reference, but some lending is to borrowers outside Euroland and completed in other currencies.)

It's been easy for lenders using simple lending strategies to earn 5%-8% per year, after bad debts and costs, since P2P lending started in 2005. You can try to earn more, but naturally the more interest you push for the greater the risks usually are.

If you lend €10,000 today and make an average of 6%, after costs and bad debts, you could have made around €3,500 in five years.

For reference, taking the average fixed-term savings rate in the EU over any five-year period, people using savings accounts would have earned €3,000 less in that time!

Sources: European Central Bank

Most providers allocate borrowers to you and set the borrowing and lending interest rates.

If you want to be in complete control yourself, some providers allow you to choose your borrowers.

Occasionally, you can even bid what interest rate you'll be willing to accept from a borrower, in a kind of reverse auction.

Usually, you just hold the loans until borrowers repay them naturally, so there's typically nothing to do but wait. (Indeed, waiting for natural repayments is the lowest-risk way to lend money.)

However, you can sometimes sell your loans early – if the P2P lending provider has that facility but usually only if there are lenders who want to buy at the right time, which is not always the case, even at the best P2P lending providers. When you sell early, you usually are only able to do so if your loans are doing well and you sell them for the full amount. Occasionally, you're allowed to set the price you'll accept for your loans, which is another decision to make.

Yes, usually, provided lending isn't your main business.

4thWay has a long, unimpeachable record in providing high-quality, independent specialist ratings and research. It's why our users rate us over 9/10.

On 4thWay.eu, we charge small fees to providers for conducting our ratings assessments on a quarterly basis. We base our method on best practice, including standards used by global banks, and we improve our ratings method further still as time passes, based on objective and calculable measures. We have historically maintained the strictness of our tests for all providers.

Although no-one can be perfect forever, we still have a 100% record in ratings and in buy and sell recommendations. We have not failed to drop a provider's ratings in the past and to produce negative commentary long before any provider has turned for the worst and caused lenders worry or inexcusable losses.

We also occasionally earn small amounts of commission when you click through some links, open lending accounts and lend.

As long-time users of 4thWay will tell you, we vigorously protect our ability to independently assess providers and express views candidly, wherever it takes us.

We at 4thWay are professional risk modellers, fund managers, experienced investors, investment journalists and others who take our responsibilities to you, our website users and fellow investors, very seriously. We have robust processes in place to protect the independence of all those involved at 4thWay. The users of our research are number one – and two and three!

Please check out our full explanation of the 4thWay PLUS Ratings and 4thWay Risk Scores.

All peer-to-peer lending providers and other online direct lending providers in the region are allowed to be listed on 4thWay.eu.

To be listed, 4thWay's specialists need data and information on legal structure, company health, people and performance.

The more data provided, and the more access to key people, the higher the 4thWay PLUS Rating they can achieve – provided their results are good enough after a detailed analysis of any data provided, typically using a stricter version of the Basel “stress tests” that global banks use.

Other criteria often need to be passed to be listed. For example, 4thWay needs to conduct background checks, sometimes consulting other, external professionals, such as lawyers and accountants.

The data 4thWay receives must be sustained and not just one time at the beginning, so we can conduct regular, fresh analyses and spot issues before they become critical.

4thWay's specialists absolutely rely on being able to access high quality information from P2P lending and online direct lending companies, as well as access to interview their key people, in order to provide a listing on 4thWay.

4thWay recently expanded outside of the UK and is encouraging more providers across Europe to get in touch to earn one of our prestigious ratings. We hope and expect to rate most of the best of the market in the coming years, as we continue to do in the UK.

Our users rate us over 9 out of 10. We have received so many incredibly positive messages over the years that really pick us up and keep us going. We really appreciate all of you who visit our websites, making it possible to continue to conduct high-quality, trustworthy ratings and research.

Please read some of the testimonials that 4thWay has received.