Guide

What is peer to peer lending, and does it still work?

By Neil. Published 11 April 2023. Last updated 2 September 2026.

Peer to peer lending puts you on the other side of a loan. Instead of depositing money with a bank that then lends it out, you lend directly to a borrower, and the platform in the middle finds the borrower, sets the terms, takes a fee and handles the payments. You get the interest the bank would have kept, and you take the credit risk the bank would have taken.

That is the entire idea. Everything else is detail about how badly it can go wrong.

How the money actually moves

1. A borrower applies to the platform. Typically a property developer wanting bridging or development finance, a small business wanting working capital, or in the past a consumer wanting a personal loan.
2. The platform underwrites the loan, sets a rate, and in secured lending takes a legal charge over an asset.
3. The loan is listed. Your money, along with other lenders', funds it. On many platforms you are lending a small slice of each of many loans rather than the whole of one.
4. The borrower pays interest, usually monthly, sometimes rolled up and paid at the end. The platform takes its cut and passes the rest on.
5. At the end of the term the borrower repays the capital, or refinances, or does not.

Step five is where the story is.

What can go wrong, in order of how often it does

The borrower does not repay on time. Extremely common in development lending, where a project runs late. The loan goes into extension, your money stays where it is, and the interest may or may not keep accruing.

The borrower defaults. The platform enforces its security, which in practice means selling the property. Whether you get your money back depends on what it sells for, which depends on whether the original valuation was honest and whether the market has moved. Recovery takes months at best.

The security turns out to be worth less than the valuation said. This is the single most common way UK lenders lost money. A loan at 65 per cent of value is only conservative if the value was real. Several failed platforms had books full of loans against valuations that no buyer would touch.

The platform fails. The worst case, and the one people underweight. Your loan contracts are with the borrowers, not the platform, and a well-structured platform holds them so that an administrator cannot simply absorb them. In practice, when a platform collapses somebody still has to chase the borrowers, enforce the security and distribute the proceeds, and that somebody charges fees which come out of your money. Recoveries have run to years.

Provision funds run out. Some platforms held a fund to cover defaults. It was never a promise, it was discretionary, and it was sized for a normal loss rate rather than a bad year. Where it mattered most, it was not enough.

What the FCA does and does not do

Every UK platform taking retail money has to be authorised by the Financial Conduct Authority. That authorisation covers how the firm runs itself: how it handles client money, how it discloses risk, whether its wind-down plan is credible, whether its promotions are fair.

It does not make the loans good. It does not compensate you when they go bad. And a platform being on the FCA register tells you nothing about whether its underwriting is any better than the ones that failed, all of which were also on the register.

Since February 2023, peer to peer agreements are classified as Restricted Mass Market Investments. That is why every platform now puts you through an appropriateness test and a categorisation question before you can invest, and why the incentives that were everywhere in 2017, cashback for signing up and bonuses for referring a friend, no longer exist.

Does it still work?

Depends entirely on what "work" means.

As a business model for the platforms, largely not, at retail scale. The firms that survived and grew mostly did it by replacing retail lenders with institutional money, which is cheaper and more patient. Zopa became a bank. Funding Circle lends with institutional funding. That happened because retail lending at scale is expensive to service and skittish under stress.

As an investment, for a specific kind of person, sometimes. The lenders who did best were the ones who spread money across a lot of loans on a small number of platforms they had read the accounts of, who treated the money as locked up for the full term, and who assumed the advertised rate was a ceiling rather than an expectation. The ones who did worst chased the highest headline rate on the newest platform, which is exactly what the marketing of the era encouraged.

If you are considering it now, the honest framing is this: you are lending unsecured or secured money to small borrowers, with no compensation scheme, no reliable way out before term, and a decade of evidence that platforms fail. The return has to be worth all of that, not just worth more than a savings account.

Where to go next

• Which platforms are still open, and what each one lends on.
• What happened to the ones that closed, which is the more instructive half of the story.
• How the Innovative Finance ISA works, and what the tax wrapper does not do.