The pros and cons of peer to peer lending

23rd September 2016
P2P, Peer to Peer Lending
Investing in peer to peer

The possibilities

 

Lose the middleman

With P2P investments, you lend directly to the borrower. This means that there is no bank to micromanage your account and consequently no one taking a cut of any of your interest. This in turn means that with a P2P investment, although not guaranteed, you could earn a far higher amount of interest than with a savings account – especially in the current climate.[1]


Tax-free interest through the IFISA

As of April 2016, your P2P investment may be channelled into the new Innovative Finance ISA . Most big companies are currently not yet offering it as they’re currently going through a regulation process. That said, most are to be expected within the near future.


Freedom to choose who you lend to

Some P2P platforms may be far more tailor made than investments through more traditional lending channels. Depending on the platform, you may be able to rank the borrowers you wish to invest with and decide based on their business or personal circumstances whether or not you wish to invest in them. This could allow your investment criteria to be far more suited to your individual needs than with a savings account where the bank makes the decision for you.[2]


Making your profits work for you

Reinvestment may be easy. With P2P, you could get a constant stream of interest from your various investments. This may be monthly, quarterly or yearly depending on the platform and you may be able to reinvest the dividends easily – again depending on the platform. As all platforms are online based, this reinvestment could be as simple as logging on to your platform account and clicking a button. Simple![3]


Spreading your bets

With P2P, diversity may be king. As it’s unlikely that you’ll be investing large amounts of capital in a single person or business, the risk of negative impact to your investment in cases of defaults could be significantly lower than a flat out investment in stocks or shares. In cases of defaults, some P2P platforms such as Assetz may offer provisions which try to safeguard your capital. Be aware that where provisions are offered, they may be subject to review on a case-by-case basis.[4]


Profits that go right back into your pocket

In some cases, you may not have to pay any money to the platform in order to make an investment. Naturally, this may vary from platform to platform, but for the most part P2P platforms may receive their profits from the borrowers, not the investors.[5]


Early access to your money

You may, in some cases, be able to re-sell loan parts in order to get access to your returns earlier through a secondary market (subject to there be a willing buyer at the desired price). This could be especially useful if you’d like to access your capital before the end of a fixed-rate investment. The stipulations of this naturally vary from platform to platform and you may be subject to some form of charge. That said, it could also be a handy way to get hold of your cash fast.[6]


The risks

 

 P2P Lending is not covered by the FSCS

The P2P industry is not currently covered by the Financial Services Compensation Scheme, a government approved body that covers investments with banks and other traditional investment streams. This means that if a platform were to go bust your money wouldn’t necessarily be covered and your capital is at risk.[7]


Every platform is different

As P2P is a relatively new form of investing, it’s rare that any two products or platforms are the same. This could make it tricky to determine which product may be right for you. That’s where Fundshare comes in. Simply fill out the criteria specific to your personal circumstances and we’ll list the platforms and accounts that meet your personal investment conditions.


Funds might not be immediately available

Depending on the investment you choose, your funds may be locked away for a certain amount of time and not immediately accessible. Be aware of the exit opportunities before you start investing.


Your capital is at risk

With P2P, you’re investing directly in people or businesses which naturally means that your capital is at risk due to fluctuations in the market or that business’s circumstances. As there is no bank to monitor your investment and ensure that you always get the interest you’re due, some platforms such as Assetz offer provision funds which aim to reduce the impact of potential defaults on investments.

                                                                                                   



[1] https://www.zopa.com/peer-to-peer-lending

[2] https://unbolted.com/uk/investing/self-select/

[3] https://www.gobankingrates.com/personal-finance/5-perks-peer-to-peer-lending/

[4] https://www.lendio.com/blog/7-ways-p2p-lending-benefits-both-lenders-and-borrowers/

[5] http://www.wealthandfinance-intl.com/peer-to-peer-lending

[6] http://www.worldfinance.com/wealth-management/real-estate/the-benefits-of-peer-to-peer-lending

[7] https://www.assetzcapital.co.uk/blog/show/86/2016/05/19/fscs-protection


Download the guide and take it with you wherever you go.

Your capital is at risk if you lend to businesses. Peer to peer lending is not protected by the Financial Services Compensation Scheme. Please read our full risk warning here.