Peer-to-Peer Lending in 2026: The Risks vs the Original Promise

When Zopa launched in 2005, the proposition was simple and appealing: cut out the banks, connect borrowers and lenders directly via an online platform, and share the margin that banks captured as profit. Lenders would earn more than savings accounts; borrowers would pay less than bank loans; everyone would win. For a period in the 2010s, with near-zero savings rates and historically benign credit conditions, the proposition appeared to work. Then COVID arrived, interest rates changed, and the structural vulnerabilities in P2P lending were exposed. By 2026, the landscape has been significantly reshaped — and investors approaching the sector need to understand what has changed.

The Original Promise (2005-2019)

The UK P2P market developed rapidly following Zopa's launch. Funding Circle (launched 2010) focused on small business lending; RateSetter (founded 2009, launched 2010) introduced a "Provision Fund" to absorb expected defaults, giving investors a smoother experience; Lending Works, Assetz Capital, Landbay, and others addressed specific loan categories.

During the long benign credit cycle of 2010-2019, P2P platforms delivered on their headline promise. Investors earned 4-7% annual returns — well above the near-zero savings rates available from banks. Default rates were low, partly reflecting genuine credit quality and partly reflecting the sustained economic expansion. The FCA regulated the platforms from 2014 but with relatively light oversight.

The appeal was straightforward: retail investors who understood they were taking credit risk (not a bank deposit) could earn meaningful yields. The IFISA, introduced in 2016, added tax efficiency.

What COVID Revealed

The 2020 COVID pandemic was the first genuine stress test for the major P2P platforms, and several failed it.

Default rates spiked. When businesses closed and personal incomes fell, borrowers defaulted at rates significantly above the historical experience that had informed platform risk models. Provision Funds — presented in marketing materials as protection for investors — were depleted by defaults that exceeded the Provision Fund design parameters.

Liquidity evaporated. P2P platforms offer "access" to loans in normal conditions by matching an investor who wants to exit with a new investor who wants to invest. When sentiment turned negative in March-April 2020, queues of investors seeking to exit built up, while new investors stopped entering. Access to funds was suspended for weeks or months on multiple platforms. Investors who had treated P2P as a liquid alternative to savings accounts discovered it was not.

RateSetter's Provision Fund failed. RateSetter had marketed its Provision Fund heavily as the mechanism that would mean investors would not lose money from defaults. COVID defaults depleted the fund more quickly than planned. Metro Bank's acquisition of RateSetter in 2020 provided some resolution, but the product was wound down rather than continued.

Funding Circle's returns declined. Funding Circle — listed on the London Stock Exchange since 2018 — saw default rates on its small business loan book rise materially. Its shares significantly underperformed from IPO. The business has continued operating and lending but the investor experience of 2020-2022 was a significant step back from the headline returns of earlier years.

The Current Landscape in 2026

Zopa is the most significant survivor of the original P2P platforms — but it has transformed itself. Zopa obtained a full UK banking licence in 2020 and became a bank. It now offers FSCS-protected savings accounts (these are bank deposits, fully protected to £85,000). Its original P2P product has been wound down. Zopa Bank operates in direct competition with conventional banks and neobanks; it is no longer a disruptive P2P platform.

Funding Circle continues to operate, lending to small and medium-sized businesses and funding itself through retail investors, institutional investors, and securitisation. Gross returns to retail investors are approximately 6-8%. Funding Circle is a London-listed company, providing some transparency into its business model and financials. Default rates in its loan book are the key variable that determines investor returns.

Assetz Capital pivoted toward institutional lending after 2020, reducing its retail presence. It operates in commercial property and development finance lending.

Kuflink is a property-focused P2P platform offering loans secured against UK property. Headline rates are typically 7-9%. The "property-secured" framing provides some reassurance, but security quality and loan-to-value ratios vary. Property security provides a recovery mechanism but does not prevent capital losses — repossessing and selling a property takes time, and the net recovery after costs may be below the principal.

New entrants continue to emerge in niche segments — invoice finance, agricultural lending, development finance — each with their own risk characteristics.

The Risks That Remain

Credit risk remains the fundamental risk. P2P is unsecured consumer credit (Funding Circle's small business loans, consumer platforms) or property-secured credit. In a recession, default rates rise sharply. The 2008-2009 experience showed that consumer credit default rates can triple from a low base in a severe recession. The Provision Funds that most platforms maintain are typically sized to absorb expected losses in a normal or mild recession; they may not be adequate in a severe downturn.

Platform risk. If a P2P platform fails (from business model failure rather than loan defaults — a genuine risk given many P2P businesses have struggled financially), the loan portfolio is managed in run-off by an administrator. Investors continue to receive principal and interest as borrowers repay, but timing and recovery rates can be uncertain. Platform failure risk is material for smaller, less well-capitalised platforms.

Liquidity risk. Secondary markets on P2P platforms are structurally fragile. They work well in normal times and fail in stress — the exact opposite of what investors want from a liquidity mechanism. Investors should assume that P2P capital is illiquid and plan accordingly. Do not invest money you may need at short notice.

The Provision Fund is not a guarantee. Provision Funds are funded by a small charge on borrowers or platform revenues. They protect against normal default rates. They are not guaranteed by any government or regulator. They can and have been depleted.

FSCS protection is not available for P2P loans. Even though the IFISA wrapper looks like a conventional ISA, the underlying P2P loans do not benefit from FSCS protection. If the borrower defaults and the Provision Fund is exhausted, the loss falls to the investor.

The IFISA: Tax Efficiency Around a Risky Asset

The Innovative Finance ISA allows P2P interest income to be earned tax-free. For a higher-rate taxpayer earning, say, 6% gross on a P2P allocation, the tax saving is meaningful. But the wrapper does not change the nature of the underlying risk.

The IFISA is most usefully compared to a Stocks and Shares ISA holding high-yield bonds — also a tax-efficient wrapper around a credit-risk-bearing asset. The key difference is that high-yield bond funds are daily-liquid (can be sold on any business day), diversified across hundreds of borrowers, and managed by specialist credit teams with public ratings and regulatory oversight. P2P platforms offer less liquidity, less diversification at the individual loan level, and less formal credit research infrastructure.

An Honest Assessment for HNW Investors

P2P lending occupies a specific niche: it can add yield above cash savings rates for investors who understand and accept the credit risk, do not need the capital on short notice, and size the allocation appropriately.

For HNW investors, P2P is typically a small allocation — perhaps 2-5% of total portfolio — rather than a core position. The yield pickup above investment-grade bonds (which currently yield 5-6%) is modest (perhaps 1-3%), and the credit risk is meaningfully higher (P2P loans are typically unsecured or property-backed with lower documentation standards than institutional lenders). The liquidity is worse than any listed security.

The comparison to note: a UCITS high-yield bond fund (Pimco GIS Income Fund, M&G High Yield Corporate Bond Fund) offers similar yields (6-8%), daily liquidity, diversification across hundreds of borrowers, professional credit management, and regulated structure. P2P would need to offer a material yield premium above these alternatives to justify its added complexity and liquidity risk.

In 2026, P2P is a mature, consolidated sector with fewer platforms than its peak. For investors who want exposure, the largest and most transparent surviving platforms (Funding Circle as a listed company) are preferable to smaller, private platforms where financial position is less visible.

How Global Investments Can Help

For clients interested in P2P as part of an alternatives allocation, our advisory team helps assess the risk-adjusted return versus comparable liquid alternatives, review the financial stability of specific platforms, and size the allocation appropriately within a diversified portfolio. We advise that P2P should never be considered a substitute for cash savings or low-risk fixed income — it is an alternative credit allocation carrying real default risk. P2P platform failures can result in capital loss; past default rates are not a guide to future rates; seek professional financial advice before investing in peer-to-peer lending.