Advantages and disadvantages of peer to peer lending
Peer to peer lending is one of the fastest growing investment channels in the UK. Every year, hundreds of thousands of people are lending their money through P2P platforms in return for interest – some sophisticated investors, some completely new to the industry.
Whether you’re considering making your very first peer to peer investment or increasing your existing investment, it’s important that you understand there are both benefits and drawbacks to doing so.
Below you’ll find a brief guide to the pros and cons of P2P lending. For more information, feel free to get in touch with the Kuflink team or speak to your Independent Financial Adviser.
The Advantages of P2P Lending
The biggest advantage for many P2P lenders is the interest on offer, for example with Kuflink you could earn up to 7.2% interest per annum.* Although the two products are not comparable, the low interest rates on offer with traditional savings accounts are prompting many people to consider other ways to make the most of their money, including P2P investing.
Most P2P platforms will offer at least one product that automatically diversifies (spreads) your investment across multiple opportunities, which also spreads your risk as you aren’t putting all of your money into one loan.
P2P loans can be used for a huge variety of purposes, which means investors have a wide array of choices when it comes to lending their money. Some of the most common uses are funding small businesses, helping clients to grow their property portfolios, or funding housing developments.
Ease of Use
Many investors find that P2P platforms are relatively easy to use in comparison with some other investment types, such as stocks and shares. They tend to be fully online and keep the jargon to a minimum, so you won’t need a background in finance to get started. Peer to peer also tends to offer low minimum investment amounts, which can provide a good opportunity to ‘dip your toe in the water’ if you’re still fairly new to investing.
As much as you should never assume you’ll be able to exit your investment early, secondary markets offer investors the chance to sell their loan parts to other investors. This provides liquidity should your circumstances change and you need access to your money earlier than planned.
Innovative Finance ISA
First launched in April 2016, many peer to peer platforms now offer an Innovative Finance ISA. This ISA allows you to use your annual tax-free allowance to invest in P2P loans and earn tax-free interest subject to meeting HMRC requirements.
New FCA Regulation
Although P2P has been a regulated activity in the UK for years, the FCA has recently conducted a review of the P2P sector and issued new regulatory guidelines for firms. These tighter rules should mean better protection for you as an investor, although it’s really important that you always undertake your own due diligence and never invest purely on the basis of a company being FCA regulated.
The Disadvantages of P2P Lending
Your capital is at risk
Peer to peer investments are not covered by the Financial Services Compensation Scheme, which means that you may lose the full amount you put in. Whilst platforms take steps to ensure this doesn’t happen, there are no guarantees – repayment of your capital plus interest is usually dependent on the borrower repaying. You should always ensure you understand the risks fully before lending any money on a P2P platform.
The term peer to peer lending covers a huge range of different platforms, loans and security types. The behind the scenes due diligence will vary between them and each opportunity should be considered in detail before you make an investment. It’s a good idea to check out who is running the platform, what their professional backgrounds are and how their loans have historically performed, although past performance is not a reliable indicator of future performance.
Online review sites such as Trustpilot are also a great way to hear customer feedback if you don’t have family and friends already investing with your chosen platform.
Interest you earn from your P2P investments is subject to HMRC tax requirements and it is your responsibility to make sure you meet those requirements. The good news is that earnings from P2P can be put towards your annual Personal Savings Allowance, which is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. This means you won’t have to pay tax on interest up to this amount.
Weight of Pros vs Cons
As with all financial decisions, the right answer will be personal to you, your circumstances and your risk appetite. The benefits of peer to peer lending are many and it’s often an effective way to diversify your portfolio or start out investing if you are searching for something that you don’t have to devote a huge amount of time or capital to.
But it’s essential that you look beyond the interest rates on offer and understand the risks; ultimately, repayment of your investment could be late and you could lose all or part of your money.
If you have any questions about peer to peer lending or the way things work at Kuflink, our dedicated Investor Relations team are always on hand to help you however we can. Simply log in to your account and talk to us via webchat, email firstname.lastname@example.org or give us a call on 01474 33 44 88.
Please be aware that we are not able to give tax or investment advice and you should you speak to an Independent Financial Adviser should you feel you need this.