Peer-to-peer lending in 2024

The peer-to-peer lending sector has undergone a remarkable evolution over the past 20 years. Since the first UK peer-to-peer lending platform launched in 2005, the sector has been through a rollercoaster of changes, from ISA opportunities and regulatory changes, to a handful of high-profile insolvencies.

 

Today, peer-to-peer lending occupies a key role in the UK economy, offering inflation-beating returns and flexible lending solutions to borrowers.

 

So what does the peer-to-peer lending space look like in 2024?

 

Better regulation

 

Two decades after its arrival, peer-to-peer lending is well established in the financial services landscape. It is regulated by the Financial Conduct Authority (FCA), and all peer-to-peer platforms must adhere with a strict set of standards and rules in order to be allowed to operate.

 

These rules include the requirement that every peer-to-peer platform maintains a wind-down plan, which lays out how investor money will be protected and returned in the event that the platform ceases to operate.

 

Investor education

 

FCA-regulated platforms must also get would-be investors to complete an appropriateness test before any funds are invested. The content of these tests will vary from platform to platform but the intention is to learn whether or not a prospective investor is aware of the risks of peer-to-peer lending and therefore whether the investment is appopriate.

 

According to the FCA, peer-to-peer lending is not suitable for all investors, and so not everyone will pass these appropriateness tests. This means that the investor community of 2024 is a lot more savvy and risk-aware than they might have been in the past. Indeed, there is anecdotal evidence to suggest that present-day peer-to-peer investors are more educated, and more engaged with the industry than ever before.

 

Larger loanbooks

 

This has also been reflected in the rising values of peer-to-peer lending platform portfolios.  A number of platforms have now crossed the £250m lending mark, including Loanpad. As of May 2024, Loanpad had total live loans worth in excess of £90m.

 

Last year, it was estimated that the global P2P market was worth $133.47bn (£88.19bn)¹, and it is growing year-on-year as more and more investors seek to diversify their portfolios and seek to earn market-beating returns.

 

Tax-free investing

 

This year, it has become much easier for investors to make use of the Innovative Finance ISA (IFISA) tax-free investment wrapper. In April 2024, new legislation was introduced which removed some of the obstacles faced by new investors, such as the ‘one IFISA per year’ limit. During the current tax year, IFISA investors can diversify their £20,000 ISA allowance across multiple IFISAs for the first time. The IFISA has also been expanded to include long-term asset funds and open-ended property funds.

 

Bridging the funding gap

 

Peer-to-peer lending has also changed the game for borrowers. There has been a well-publicised funding gap for small and medium-sized enterprises (SMEs) in the UK in recent years.

 

After the global financial crisis, many mainstream banks opted to stop lending to SMEs, and their lending appetite has yet to return. This left a gap in the market which alternative lenders such as peer-to-peer lending platforms have been able to fill.

 

Peer-to-peer platforms work with many SME borrowers to help arrange funding for everything from business expansions, to property developments, and bridging deals. For many SME borrowers, this is their best chance to secure a loan in an unforgiving economy.

 

New risks

 

Economic uncertainty has persisted for several years in the UK. At the start of 2024, the country was in a recession, and interest rates were stubbornly high. This has presented a few new risks in the peer-to-peer lending space.

 

The main risk in peer-to-peer lending is the risk of a default if a borrower is unable to meet their repayment terms. When interest rates are higher, so too is the risk of missed payments, and this could translate into losses for investors. Peer-to-peer lenders such as Loanpad have been working to reduce this risk by enhancing their borrower due diligence and – where appropriate – offering loan extensions or refinancing options. Loanpad also maintains all of its loans at a maximum of 50% loan-to-value providing a significant buffer in the event that the security needs to be sold to recover investor funds.

 

Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more.