When you invest via peer-to-peer lending, you're earning interest by loaning your money directly to an individual, small business, community group or charity.
Borrowers list their request on a provider’s website, and investors browse the website to decide which loans to invest in.
Lenders may be able to lend the full loan requested, or just a portion of it. The provider may also group up similar loan requests so the lender has the opportunity to invest in a variety of loans at one time.
Borrowers have to follow certain rules such as being honest about the information they provide about how they will use the money and their ability to pay it back. They can borrow a maximum of $2 million in any 12 month period, although some services may only allow smaller loans.
The borrower(s) may be unable to repay you, so you could lose your money or not get the interest you've been promised.
Some providers offer ways to reduce this risk - such as spreading your loans across more borrowers, or guaranteeing the repayments themselves. But this doesn't eliminate the risk.
Even where the repayment is guaranteed you will only receive repayments if the person or service providing the guarantee has enough money to pay.
Unlike some other investments, you may not be able to sell the loan or withdraw your cash whenever you want. If you're lending money you need to make sure you can afford to have your money tied-up for the period of the loan.
The general risks involved in investing also apply.
1. Some providers provide more administrative support than others
Make sure you read the description of the service carefully. Administration can include arranging for the money to go from you to the borrower(s), dealing with repayments and interest payments, and chasing any defaults.
2. You need to do your own checks
We don't check the financial health of borrowers or any information you get from the lending service, so it's important you ask the service about the level of checking they have done.
3. If you want to re-invest you may have to wait
At a bank you can often roll over your term deposit as soon as it falls due, but with peer-to-peer lending you may need to wait until there are peers who want to borrow it. You may miss out on some interest while you're waiting.