Published on April 11th, 2018 | by admin0
Things to Think About Before Considering Peer-to-Peer Lending
Despite the rise in the Bank of England’s base rate last November, and promises of more rate rises, savers are still struggling to find a home for their money where inflation won’t erode its value over time.
This has led to a growing number of people seeking new places for their money to grow and taking on bigger risks. While some have turned to traditional products, such as stocks and shares ISAs, others have looked to peer-to-peer lending.
P2P lending is a newer solution that promises attractive returns to those willing to loan out their savings to companies, or individuals that are in need of the cash.
Peer-to-peer lending is controversial, especially since the government approved a new type of Isa, the Innovative Finance Isa (Ifisa), in 2016. This new type of ISA allows customers to receive income from the peer-to-peer loans they make free of tax.
Whilst peer-to-peer lending is still fairly new, it offers plenty of benefits:
- Potential for higher returns: P2P lending can potentially give you access to significantly higher returns than you could get through a high-street savings account.
- Damage Control: P2P platforms often let you spread your capital across multiple loans. Which allows you to better manage your exposure to risk.
- Personal Savings Allowance: Any interest you earn through peer-to-peer lending is now included in your ‘Personal Savings Allowance’. This currently stands at £1,000 interest for individuals paying basic-rate tax and £500 for higher rate payers.
- Choice: You can choose who you want to lend to. For example, you can decide you only want to lend to borrowers who have an asset such as property or a business as security.
- Access to your money at short notice: Many P2P lenders let you liquidate your funds before the loan ends if you need, as long as they can sell that loan position on. You will of course need to check this with the individual platform. For example, on average, BondMason clients have been able to fully liquidate their positions in full within 24-48 hours.
No prepayment penalties: You don’t face penalties for paying off your loan early, which can help you save money spent on interest charges over time.
As with many business ventures, peer-to-peer lending can be a risk. If you are considering lending your cash, there are a few things you should consider first.
Who am I lending the money to, and is it spread around?
Different peer-to-peer lending platforms will all have different strategies. Some make a virtue of the fact that you are investing in a particular property or product, whilst others choose to spread your money around different borrowers, arguing that this lowers the risk when some borrowers default.
How are borrowers checked?
Most platforms have their own screening process, so it is a good idea to check this process and make sure you understand it. Look into whether they using a credit reference agency, as banks do, and whether are there other checks?
Is there any provision for bad debts?
This varies on different platforms. Some offer ‘guarantees’ or provision funds to help soften the blow if a borrower defaults, others have insurance policies to cover any loss. It is key to remember though, that none of these platforms are enshrined in law. Therefore these guarantees are not comparable to those from a bank, where your money is protected up to a certain limit if the bank fails. Some funds pay out at the discretion of directors, others automatically pay out. Look to see how large these funds are in relation to outstanding loans.
Is your chosen platform a member of a reputable association?
The Peer-to-Peer Finance Association (P2PFA) is the main trade body. However, not all companies involved are members. You can check membership at p2pfa.org.uk to see if your chosen platform is a member.
Can I use an IFSA?
Putting your peer-to-peer investment in an Isa makes it more attractive, as you aren’t paying tax on your returns. Not all platforms offer it.
Whilst peer-to-peer is in its infancy, it is steadily growing and can be a great way to invest your money. If you’re wary of the level of risk involved then it is worth discussing your options with a financial advisor.