Small peer-to-peer loan

Peer-to-peer (P2P) lending means borrowing money that ultimately comes from private individuals rather than from a bank's own funds. It can take two very different forms: a regulated online platform that matches many investors with many borrowers, or an informal arrangement between two people, whether friends, relatives or strangers who met online. The protections, risks and costs of each are not the same.

This page explains both, with a focus on the UK, and shows how to tell a genuine platform from the private "lenders" who advertise on social media.

How P2P lending platforms work

On a P2P platform, investors put money into the platform, which lends it to borrowers who have passed its checks. The platform sets or helps set the interest rate, collects repayments and passes them back to investors. For the borrower, the experience is often similar to applying for an ordinary personal loan online: an application form, a credit search, an affordability assessment and a fixed repayment schedule.

In the UK, operating an electronic lending platform is a regulated activity, and platforms must be authorised by the Financial Conduct Authority. As a borrower you should still receive the standard pre-contract information, including the APR and the total amount repayable, and the usual right to withdraw from a consumer credit agreement within 14 days.

The UK P2P market has changed

P2P consumer lending grew quickly in the 2010s, but the market has since shrunk and consolidated. Several well-known platforms have stopped lending to consumers, been bought by banks or turned into banks themselves. As a result, fewer genuine P2P options exist for small personal loans than older articles suggest. If a website calls itself a P2P lender, check its current status on the FCA Register rather than relying on its reputation from years ago.

Investors, for their part, should know that money lent through a P2P platform is not protected by the Financial Services Compensation Scheme in the way bank savings are.

Borrowing privately from friends and family

The most common form of person-to-person lending is not a platform at all: it is a loan from someone you know. This can be the cheapest and most flexible option, often with no interest. It also carries a different kind of risk, because a missed repayment affects a relationship rather than a credit score. To keep things clear:

• write down the amount, the repayment dates and whether any interest applies;
• agree what happens if you cannot pay on time;
• both sign and keep a copy;
• repay by bank transfer so there is a record.

Interest-free arrangements of this kind are discussed further on our page about loans without interest.

Private lenders online: a major scam risk

Social media groups and marketplaces are full of people claiming to be "private lenders" or "P2P investors" offering quick loans to anyone. In the UK, anyone who lends money to consumers as a business needs FCA authorisation. Someone lending without it may be an illegal money lender, often called a loan shark, who can charge excessive amounts and use threats to collect. More often still, the "lender" is simply a fraudster.

Typical signs include:

• a request for an upfront fee, deposit, insurance or "legal charge" before the money is sent;
• approval promised without any credit or affordability check;
• communication only through WhatsApp, Telegram or direct messages;
• pressure to send copies of your ID and bank card, which can be used for identity fraud;
• a story about being an overseas investor or a charity.

Never pay money to receive a loan. If you have shared personal or banking details, contact your bank straight away.

Cost comparison

A regulated P2P loan is priced much like a bank loan, based on your credit profile, so compare it on the same terms: APR, total amount repayable, any platform or arrangement fees and charges for late payment. Do not assume that P2P is automatically cheaper. For applicants with weaker credit, a platform may decline or quote a higher rate. Our loan cost calculator can help compare offers.

Community alternatives built on mutual lending

If the attraction of P2P is the idea of borrowing from people rather than from a corporation, community finance may be a better match:

• Credit unions are owned by their members: savers' money is lent to other members, and interest is capped by law in Great Britain.
• Community development finance institutions lend to people who struggle to borrow from banks, often with support alongside.
• Faith and community schemes sometimes provide small interest-free loans.
• Rotating savings groups, in which members contribute regularly and take turns receiving the pot, operate in many communities on trust; they offer no legal protection, so only join one with people you know well.

See our overview of social micro-loans for more on these routes, and the page on applying for a small loan online for general application tips.

What happens if you cannot repay

With a regulated platform, missed payments are handled much as with any lender: reminders, charges set out in your agreement and, eventually, a default recorded on your credit file and possible referral to a debt collector. Talk to the platform early, because regulated firms are expected to treat customers in difficulty fairly. With a private loan from someone you know, there is no credit file entry, but the personal cost can be higher. Being honest early and proposing a realistic revised plan is almost always better than silence.

Checklist before borrowing person to person

• For a platform: is it authorised on the FCA Register right now, under the same web address?
• Have you received the APR, total repayable and repayment schedule in writing?
• For a private loan: is there a signed, written agreement?
• Has anyone asked you for money before paying out? If so, it is a scam.
• Could a credit union or benefit advance meet the need at a lower cost?

If you are already struggling with debts, take free advice from Citizens Advice or MoneyHelper before adding another loan. Complaints about a regulated platform can go to the Financial Ombudsman Service once the firm has replied.