In February 2013 I signed up to the three biggest peer-to-peer lending services in the UK. Zopa*, Ratesetter* and Funding Circle*.

The concept behind peer-to-peer lending is pretty simple. There are normal people who want to borrow money, and there are normal people who want to invest their money. The peer-to-peer lending platforms simply bring them together.


Back then they were all slightly different. But now Ratesetter* and Zopa* are pretty much the same. As an investor at Zopa or Ratesetter, you get a set percentage return that is guaranteed by an insurance fund. That means that you get the same amount even if some of the people receiving your money default.

Peer-to-peer lending is called that as a reference to the fact that money flowing from normal people to normal people. But in reality, using Zopa* and Ratesetter* feels a lot like your money is just in a savings account. You have a choice of how long to invest for (instant, 1-year or 5-year) and don’t know or have any link to the person receiving the loans.

So far everyone has been paid out and the insurance funds at both are pretty flush, but they are not risk-free. If there is a big enough disaster then money could be lost. Personally, I think the risk is pretty small and the returns offered make it well worth while.

Funding Circle is a bit different. First off you are lending to businesses and not to people. And you are lending to particular businesses that you have chosen. You can look through their prospectuses, financial history and choose on a case by case basis who you lend to.

Here is an example of a loan that is available to fund today:


Funding Circle* is a lot more hands-on than the other two. Instead of just putting your money in and leaving it, you need to actively seek out and choose the companies you lend to.

There is also no insurance. So if the company defaults you lose your money. But because of this extra risk, Funding Circle has always offered the highest returns of the three.

And perhaps unsurprisingly Funding Circle used to be my favourite. After working out what was what, I originally split the money I had set aside for peer-to-peer lending roughly 70% in Funding Circle*, 20% in Ratesetter* and 10% in Zopa*.

When I wrote my last article about Funding Circle two years ago, I was averaging about 9.5% after fees and bad debt. But since then the rate of bad debt has increased and the offered rates have gone down.

Now my average annual return is just 7.0%, well below their estimated 9.2%. Whereas Ratesetter* has stayed level at about 5.3% and Zopa* is at 4.7%.


Now 7% still sounds pretty great and is quite a bit better than Ratesetter*. But I don’t believe that it is accurate. When I delve into the details of the loans, there a few that are marked as ‘late’ – which are not counted as bad debt and doesn’t go into the equation to work out the 7% – but that quite obviously should be bad debt.

Here’s one.

outstanding-loans-funding-circle peer-to-peer lending

That loan was last paid in July 2015, that’s 18 months ago! If that’s not bad debt I don’t know what is?

And I’m not alone. Over the years I have convinced quite a few friends to sign up to Funding Circle, and they are all also seeing well below estimated return.

The increasing defaults rates don’t surprise me. Funding Circle’s clients are small businesses who aren’t or don’t want to get a cheaper loan from elsewhere. They are going to include some of the most fragile businesses around. Susceptible to variance in the market.

Variance that we see when there is major uncertainty about what is going to happen. Such as when a country chooses to leave the EU.

I think that the default rates are just going to increase.

Don’t get me wrong. I still think that Funding Circle is great. I just think that it is no longer better than the other two.

So for the last year I have slowly been shifting my money out of Funding Circle and into Ratesetter*. I am just letting my current loans run their course and instead of reinvesting my profits, I am withdrawing them.

Now my split has changed to roughly: 35% in Funding Circle, 55% in Ratesetter* and 10% in Zopa*. In another few years, my Funding Circle will probably be down to about 5%,

Why Ratesetter* and not Zopa*? I don’t really have any preference. Currently, the rates are higher at Ratesetter so that is the one I’ve been going for, but if that changes I’ll start depositing into Zopa*.

To sum it up: I am moving from Funding Circle to Ratesetter* because:

  • The difference in rates has got a lot closer.
  • A lot of the tricks I used to maximise my rate at Funding Circle don’t work anymore.
  • Ratesetter* allows automatic reinvestment so takes almost no work. With Funding Circle you need to manually choose the loans and invest.
  • Default rates are rising on Funding Circle. With the uncertainty of Brexit looming I expect more defaults. Ratesetter* lends to people and not businesses and therefore I consider them to be less fragile (a business is more likely to go bankrupt than a person).

Do you invest in peer-to-peer lending? If so how are you getting on?

Peer-to-peer lending is one of my favourite types of investments, but it is not my only one. I also invest every month into the stock market (check out this post for my tactics) and own some property.

* These are refer-a-friend links. If you click through the links and sign up to one of the p2p lending services, we’ll both get a bonus. You can claim the bonuses at all three sites. The bonuses are:

  • Zopa. (£50 sign-up bonus). Invest £2,000 and get a £50 bonus, (basically an instant 2.5% return).
  • Ratesetter (£100 sign-up bonus). Invest £1,000 for 1 year and get a £100 bonus. (10% extra on your first year on top of the standard return).
  • Funding Circle (£50 Amazon voucher each). Invest £2,000 or more for 1 month and get a £50 Amazon voucher.