If you're looking to get started in peer-to-peer lending, you're not alone. As one of the fastest-growing sectors in the financial industry, and with current savings rates so low, plenty of people are turning to peer to peer to get a better return on their savings.
Yet as a relatively new form of lending and investing, there are plenty of questions surrounding this form of alternative finance. Here we answer some of the key questions to consider before you decide whether peer-to-peer lending is the right option for your hard-earned cash.
Is there a significant risk to my money?
That depends on how much risk you want to take. As a way to get a return on your investment, peer-to-peer lending falls somewhere between traditional saving and more direct investments, although exactly where on the spectrum depends on what platform you use and the type of loan provided.
Companies like Zopa and Ratesetter are much closer to the risk levels of a traditional savings account, as a provision fund is used to safeguard your money and the risks surrounding their loan types are lower. In fact, since Ratesetter was launched in 2010, every penny of investment and interest has been returned to those using it.
Other companies like Upstart offer higher rates of return in accordance with associated risk levels, but provide detailed checks on borrowers and let you decide how you want to spread your money to get the balance of risk and return that you want.Overall, these are all still relatively young platforms however, and a very large-scale financial crisis in the wider economy could still mean trouble in the long run, (although any debt still owed is always chased up by the platform). However, with the breadth and depth of investment types and interest rates on offer, there may be a peer to peer platform to suit your needs. Search our database to browse current peer to peer lenders.
How do I choose a platform?
This depends on what kind of investment you're looking to make. You'll need to decide exactly what balance of risk and reward you're looking for, and what types of loans you want to invest in. If you've got a bit of spare cash that you're not likely to be using and want to see if you can get a big return, you might consider using it with a higher-interest platform - many companies offering this style of peer-to-peer lending will help you spread your money across multiple loans to help minimise any risk to your investment. On the other hand, if you're looking for somewhere to stash your life savings and simply want a better rate of return than your savings account is offering you, you may prefer to choose somewhere with a healthy provision fund that has a good record on returning investments.
Will I be able to get my money out at short notice if I need it?
Peer-to-peer lending almost always operates on fixed terms, so your money will be locked away until the investment period ends, and won't be immediately available if you desperately need it or if you have a sudden unforeseen expense.
Decreased flexibility in terms of accessing your money may be one of the prices you pay in return for better rates. However, many companies like Zopa now offer a way to get your money back before the term ends in just a few days. This can reduce your rate and cost you a small fee, however, you should still only invest as much money as you think you can do without, or it may defeat the purpose of getting a higher rate. Other platforms operate notice accounts, or allow you to sell on your loan parts on an aftermarket, so there is usually an option. Check our database to find out how different providers operate.
How else can I minimise the risk?
As any investor worth his or her salt will tell you, you can reduce the risk of losing your money by spreading it around. If there was a 2% risk of the borrower defaulting, and you loaned all your money to one person, you'd have a risk of losing everything. If that same money was spread between 20 people, the probability becomes significantly lower.
Most companies will do this automatically via their platform, but you might also want to use the same principle yourself across multiple platforms, having some money in high-interest loans and some in a safer provider with a provision fund if things go wrong.As an investor, it's down to you to get the right balance with your money. One of the advantages of peer-to-peer lending is its flexibility, so don't be afraid to shop around until you get the perfect deal for exactly how you want to save your money. With the right balance, it can be a hugely powerful tool in making your savings go a lot further.
Our straightforward guide to peer to peer investing
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