The principle of peer-to-peer lending is quite simple – it connects investors like you with people who want to borrow money. Lenders agree the loans with borrowers, use the investors’ money to fund those loans, then the lender acts as the ‘middle-man’ managing the loans until they are repaid. Some companies pre-fund the loans (they lend their own money out first and then substitute it with investors’ money afterwards), whilst others put the loans on their platform, and wait for investors’ money to be placed there in order to fund the loan.

The type of loan that people can invest in varies widely – for example, loans might be made to individuals, small to medium size businesses, buy-to-let landlords or commercial and residential property developers. Some of these loans may be unsecured, whilst others may be secured by charge against the property; the different types of loans represent different levels of risk of default, and this is normally reflected in the interest rate offered to the investor.

The peer-to-peer platforms will normally allow or require investors to spread their risk, by investing across a number of loans, which may have different repayment dates.

Interest is normally paid to the investor on a regular basis, or as and when each of the loans in their portfolio is repaid, with the option to withdraw that money or to re-invest it in further loans. Early withdrawal of money that has been invested in a loan may not be allowed at all, or it may be allowed only if and when there are other investors’ funds waiting to be invested.