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Peer-to-peer NISAs: Your questions answered

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With peer-to-peer lending becoming eligible for ISAs next year, this innovative investment option seems here to stay. These are the basics.

What is peer-to-peer lending?

Peer-to-peer lending (P2P) is a way of lending money to a company or individual through a designated platform. These include Zopa, Funding Circle and Rate Setter. For the borrower a P2P loan is essentially a bank loan without the bank.

You may associate P2P lending with Kickstarter and Zack Brown – the man who accidentally raised more than $55,000 to make a batch of potato salad – but in fact these are very different concepts. P2P tends to attract already-established businesses and, importantly, lenders are repaid monthly and earn interest on the money they lend. P2P platforms are also regulated by the FCA.

How much do I need to invest?

With P2P platform Zopa you can invest as little as £10 with no maximum investment threshold. Loans run for one month up to several years but, because you receive monthly repayments from borrowers, you can re-invest this money to earn compound interest.

According to Zopa’s Mat Gazeley there are over 52,000 active lenders on his platform alone. He says: “It’s easy to use, so beginners are definitely welcome!”

When will P2P lending be included in ISAs?

In March 2014 the government announced that P2P lending would be eligible in the new ISAs (NISAs), making any interest earned by lenders tax-free. These NISAs are expected launch in early 2015.

The government has yet to decide how exactly this process will work, but according to Zopa it’s likely that money already invested in standard NISAs could be moved into special P2P NISAs. Annual limits will still apply.

Gazeley says: “It is very exciting to be considered for ISAs as it means it’ll be even easier for our customers – they won’t have to worry about filing tax returns. ISAs are also an extremely popular way for UK customers to put away their money, so we’re happy to be included as an option.”

What are the risks?

Because you’re lending money directly to borrowers, your loan contracts are with individuals. There’s always a risk that they will be unable to repay.

In addition P2P lending is not covered by the Financial Services Compensation Scheme – and it’s unlikely that this will change when P2P NISAs are introduced – meaning you have no way of reclaiming money that you lose.

Some platforms try to mitigate these risks by credit scoring borrowers to determine how risky the loan would be, helping you diversify your investments or establishing a ‘safeguard’ fund to cover lenders in case a borrower cannot repay.

Gazeley says: “Zopa’s fund has had a 100 per cent success rate in covering our lenders since it was introduced in May 2013. We also lend out money in small chunks to further spread out risks.”

If a P2P platform goes out of business a third party would generally step in to administer any outstanding loans.

Always read a platform’s full risk statement before lending money through it.

How are P2P lending platforms regulated?

The FCA began regulating these platforms in April 2014.

As of October 1st platforms must give lenders details of how the process works, make them aware of the risks, have a process in place so that repayments continue if the platform goes bust, keep client money separate from company money and give customers access to a complaints process.

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