There’s No Such Thing as “No Lender Fee”

P2P lending costs money for both borrowers and lenders. Because there's no such thing as a free lunch!

You can find out true costs of lending through various P2P lending companies elsewhere on 4thWay and we'll show you where further below.

But, firstly, here's how “free” lending actually costs you money, starting with an example from another finance-related industry that all of you should be familiar with, namely travel money exchange:

Fee-free! 0% commission!

Apparently it costs us nothing to exchange currency for our holidays. “Fee-free exchanges with 0% commission!” they say.

Meanwhile they hide the real cost to you in the exchange rate.

The real, “interbank” exchange rate could be £1 to €1.20, but you get just €1.10 per pound. You pay no fee or commission, but for each £100 in currency you exchange, you're getting €10 less than you should. The bank or broker that did the exchange pockets money that way.

How it works in P2P lending

Most P2P lending companies use the same techniques to convince individual lenders that their lending costs them nothing at all.

(Indeed, I think many P2P companies truly believe they are free for lenders. It's a little similar in share investing, where many share funds have long considered certain costs to be unrelated to investors, even though those costs substantially reduce investors' returns.)

There are three parties involved here: borrowers, lenders and the P2P lending company. Before you can work out who pays whom, you first need to think about why each of us pays.

Why does the borrower pay?

If you're the prospective borrower, you want cash! That's what you're paying for. You almost don't care how you get the money provided the interest rate, and terms and conditions, are acceptable, and that the lender is willing and able to get you the money in a timely fashion.

Why does the lender pay?

Or you're a lender: you want to set up your own lending business so that you can earn interest, just like running your own little bank.

But you don't have the time, skills or technology to find borrowers yourself and then assess their creditworthiness, set up the repayments, chase late payers and take them to court if they move home without telling you.

So what you do is you outsource most of the operations of your little lending business to another company. There are dozens of them to choose from and they're called P2P lending companies.

Who pays whom

Since the borrower is paying, above all else, to borrow money, the borrower owes you, the lender, who is giving them that money. The borrower does not owe Invest & Fund*, Proplend* or easyMoney, because they aren't lending the money.

It's you, me and other individuals who are supplying borrowers with the product they want: cash. And the contract states that it is us lenders lending the money, not easyMoney and the rest.

We lenders, on the other hand, are paying to outsource most of our operations to these P2P businesses. So we – and we alone – pay the P2P lending companies.

How do lenders pay when there is no lending fee?

Here's a hypothetical example.

P2P lending companies A, B and C all charge borrowers 10% APR. “APR” means that all fees are re-calculated and incorporated into the interest rate itself. I.e. it's the price all-in for the borrower.

The P2P lending companies can't charge arrangement fees or other loan fees on top of that 10%, because 10% is the market rate and many borrowers would simply look elsewhere. So it has to be within that 10%.

So the borrowers all agree to pay 10% APR in return for our cash (not the P2P lending company's cash).

But the three P2P lending companies take their own cut out of the 10% in different ways:

• P2P lending company A has a 1% borrower fee and a 1% lender fee.
• P2P lending company B charges what it calls a 2% borrower fee. Lenders pay no fee.
• P2P lending company C takes nothing from borrowers and says it charges the lender 2%.

It doesn't matter how you slice it, the borrower is paying 10% APR for the loan that you provided.

But you don't get all of the money. Whichever company you choose, you are getting 8% interest, as the middleman is taking the difference. Which means the outsourcing commission you are paying is two percentage points off your earnings.

Le's put this another way: do you really think P2P lending company B is “free” for you? Do you think you're really getting a better deal there than with company C? Of course not.

The borrower pays you – and you pay the P2P lending company. No matter how the P2P lending company says it allocates its fees.

Let's put this in an extreme way just to ram the point home: if borrowers are paying 10% interest to P2P lending company “D” and that company takes a 9% “borrower fee” – leaving you 1% interest – do you really think you're paying nothing?

How much do “No lender fee” P2P lending companies really cost?

In fairness to the industry, it's hard to explain all that. Much easier to say “no lending fees”.

But the one area that P2P lending companies are most slacking on is revealing the true costs to lenders.

4thWay does sometimes receive enough information to make a fair estimate of costs though. In our comparison tables, if you check the boxes next to individual comparison results and click on “Compare selected” you can drill down to see costs.

Those cost fields in our comparison tables sometimes contain the words “Insufficient data” or “Restricted info”, but we've gradually filled in many of those gaps over the years, as we've pulled together the data we needed for our specialists' estimates.

Why do costs matter?

You might now be thinking that the rate is all that matters. 6% after costs is 6% – who cares about how much the costs are?

But consider a company that charges borrowers 20% and passes you just 6%, while also giving you all the risk of the loan?

Compare that with a company doing similar loans that charges borrowers 8% while giving you 6%.

The second P2P lending company is probably doing safer loans and therefore it's giving you a far better return for your risks.

Probably. Not all P2P lending companies have shown themselves to be good at pricing borrower interest rates, which is why you – or 4thWay – still need to assess them carefully.

So keeping an eye on costs is one important check to see that you're not taking all the risk without the reward to go with it.

Lender fees can be relevant for tax purposes

In rare circumstances, a lender fee can leave lenders worse off tax-wise. So there's a slight advantage to having no lender fees.

But much more important is the overall lending costs, which are always:

• Borrower APRs (which includes fees charged to the borrower up front converted into an annual percentage)
• Minus lending interest paid out to you.

Read 4thWay's core guides to P2P lending.