Peer to Peer Lending: An Alternative Investment Option

Peer to Peer Lending

Peer to peer (P2P) lending is an alternative way to make your cash work harder for you than the more traditional savings and investments products with their typically low interest rates – but does comes with risks.

Investors looking for alternative finance options, however, appear to take these risks on board, with expectations that the sector will continue to double in size every six months going forward.

This is supported by data from the Peer-to- Peer Finance Association (the self- regulatory body for the sector) which reveals that during the second quarter of 2016, cumulative lending by the sector amounted to more than £5.8 billion — £658 million of which took place between April and June 2016.

What is P2P lending?

Compared to other investment and savings products, peer to peer lending is a relativity new concept in finance that pioneered in the UK in 2005. In layman’s terms, it matches private investors with borrowers (who can be businesses or individuals). In the main this is facilitated via an online-based platform to allow lenders to deposit funds and then borrowers to apply for those funds.

There are a number of specialist P2P platforms aimed at different audiences. ZOPA and Ratesetter, for example, are aimed at consumers looking to borrow an unsecured personal loan.

Others are aimed at businesses such as FundingCircle or RebuildingSociety, so investors can make funds available to businesses looking to expand or grow. As well as personal and business loan platforms, P2P lending has recently seen an explosion of property-based platforms. This is due in part the lack of traditional funding in the property space by banks, and also the comfort factor us Brits place in property as a medium to long-term investment.

So why P2P?

There is an increasing demand for property in the UK and, as such, someone will have to fund it. With P2P platforms coming online, this could be a way for individual investors to get involved in funding or part funding property developments. OctopusChoice, for example, is a packaged and managed service that enables people wishing to invest in bricks and mortar to enjoy an estimated gross return of 5.1% on their investment. This amount will of course vary, depending on how much and when you invest, and how the loans in your portfolio perform. The process is typically simple:

  • You choose how much you want to invest (amounts typically start at £10 with no ceiling limit).
  • The P2P company lends your money (as well as 5% of their own funds for each loan, with OctopusChoice) to a carefully selected borrower.
  • Your money is secured against bricks and mortar, giving you extra security if the borrower defaults on repayments.
  • You receive your initial investment back first, then monthly interest amounts.

Is P2P lending for you?

The following are some reasons you maybe wish to include P2P lending as part of your investment portfolio:

  • Interest rates – with the recent climate of low interest rates, it is difficult to realise any real interest return from a lump sum that could be sat in the bank, even in a fixed rate bond, as rates are so low.
  • Choice – With most P2P platforms you as the investor will be able to pick and choose which developments you wish to fund. This allows to you to choose an investment opportunity based on your own criteria, so matching your attitude to risk.
  • Risk – because you are able to choose the types of investments to fund, you will have a level of risk control you don’t see in other property funds such as investment funds. Most platforms also carry out their own due diligence on developments before they get listed and will share that with you.
  • Low cost of entry – most platforms allow you the flexibility of starting at anywhere from £10.
  • Lower fees – because fintech takes a lot of the administration costs away, there are lower costs to participate.

The risks

With financial opportunities such as this, there are of course risks and it important that you understand them. As with any investment, there is a possibility that you get back less than you put in. It is also important to know that your capital and interest are at risk, as your investment is not covered by the Financial Services Compensation Scheme (FSCS).

You must remember, too, that you are investing in a secured loan, so the ability for the P2P lender to recover the capital and interest on these loans is determined by the ability or willingness of the borrower to repay as well as the underlying value of the asset (which could be affected by a material downturn in the property market). Please note that none of the included content should be viewed as a personal recommendation. If you would like more information on any of the topics provided then please contact us.