You are here: Home - Investing - Experienced Investor - News -

How to navigate the world of peer-to-peer lending

Written by: Iain Niblock
Iain Niblock, chief executive of peer-to-peer (P2P) investment aggregator Orca Money explains how the sector has evolved, where the investment opportunities lie, as well as the potential risks.

Peer-to-peer (P2P) lending – where investors directly fund loans to people, small businesses and property borrowers – has experienced strong growth in recent years due to the fallout from the financial crisis and the opportunities created by technological development.

In some cases, cash ISA savers are losing money where inflation exceeds the interest rates on offer. In addition, many are frustrated by the uncertainty in stock markets, which in a lot of instances produced losses in 2018. For example, the FTSE 100 index dropped 12.5% in 2018.

P2P lending, on the other hand, is a fundamentally different asset class which has largely delivered on its promises of providing investors with stable, predictable returns.

Zopa was the first P2P lender, starting way back in 2005, aiming to be an “eBay for money,” and has been joined by big brands such as Funding Circle and RateSetter in the past decade.

Nowadays, investors can put money into loans backing a range of assets: from consumer, to  business finance, to property. In most cases, this can be done within a tax wrapper using the Innovative Finance ISA (IFISA), which allows investors to enjoy tax-free earnings on their P2P investments within their £20,000 annual ISA allowance.

Several platforms offer IFISAs, while a number of companies also allow you to invest across a different P2P platforms, lending sectors and a large number of borrowers, spreading both money and risk within the tax-free wrapper.

What are the risks?

Some investors automatically compare P2P with savings products because the offerings look and feel similar to pre-crisis savings rates. However, P2P investments hold an extra layer of risk for the returns on offer and P2P should be considered separately from cash savings.

P2P is an investment – and as with all investments, due diligence is vital. Just as no stock is the same in the equity market, every P2P platform is different, and loans will be originated in a different way across lenders.

The biggest risk is not that a single borrower defaults, but that a large number of them default as this could consume an investor’s interest and, ultimately, affect the capital too.

It is also necessary to ensure the platform itself is stable, so due diligence and spreading the risk are important. Ultimately, it is not a question of one type of ISA or the other. Diversification is key to building a balanced portfolio.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

ISAs: your back-to-basics guide for 2018/19

Here’s everything you need to know to make the most of your unused ISA allowance ahead of the 5 April deadli...

A guide to Sharia savings accounts

A number of Sharia savings products have upped their game in recent months, beating more familiar competitors ...

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

  • Discover how your pension can be used to make a range of investments with attractive tax advantages. By…
  • RT @Defaqto: Looking for your first job? We outline our top tips for understanding and improving your credit score. Take a look @YourMoney
  • @YourMoneyUK Biased. People don't look at this stuff rationally. They also would not buy annuities if there ware decent alternatives.

Read previous post:
First time buyers take over from buy to let

First time buyers are driving the housing market, according to new lending statistics from UK Finance.