P2P risk/reward

Published on May 26th, 2017 | by P2P Lending Advice

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Getting Started with Peer-to-Peer Lending

With interest rates at an all-time low, investors are still being drawn to the attractive returns available from peer-to-peer lending platforms. By allowing investors to finance loans for a variety of different individuals and businesses, these lending platforms can provide returns of 3% and above whilst still providing some degree of security from risk. Getting started with peer-to-peer lending can often seem more daunting than it really is, and a basic grip of the different products on offer can often be all that investors need to take the next step.

Types of Investment

Peer-to-peer lending has proliferated across many different sectors; there are platforms which specialise in Buy-to-Let mortgages (Landbay), business investment (Funding Circle, FundingKnight), bridging finance (Kuflink, LendInvest) and personal loans (Zopa, Ratesetter) amongst many others. The first thing to determine is what particular sector you’d like to invest in – if the safety of real estate takes your fancy then seek out a platform specialising in this, or if you have a preference for helping British businesses to expand then choose an appropriate lender.

Risk/Reward

As with all investment, there is a certain amount of choice between the risk you take on and the returns you can generate. To illustrate the options most lenders provide, we’ll list some common product types here – however, these are not indicative of any actual lending products, and are purely for the purposes of illustration.

Low Risk, Flexible – up to 3%: Most platforms provide investors with the option to “dip their toes in” with a product like this. With short withdrawal times and good security, this product is functionally very similar to a high street bank account (though without coverage from the FSCS).

Low Risk, Less Flexible – up to 5%: For investors who are happy to lock their money away for a longer period of time, many lenders provide a more advanced option. Similar to set-period bonds, these products prevent investors from withdrawing money quickly, but are still covered by the lender’s “default coverage” fund.

Higher Risk, Less Flexible – up to 8%: For a higher return, many lenders allow investors to forego protection under their default coverage fund. This means that if their borrower fails to repay the loan, they will lose their stake, and these loans are often made to individuals without a perfect credit rating. However, since each investor typically only funds a small portion of each loan the impact of a single borrower defaulting is fairly low.

High Risk – 8%+: There are plenty of new lenders who offer investors returns of up to 12% (and even more). As always, the risks reflect the possibility of a high reward, but investors should always keep in mind that if it sounds too good to be true, it might be the case.

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