From an investment point of view, P2P lending can be viewed as an asset. It is an avenue worth a try if you are looking into new opportunities into which you can invest your money. However, you need to be aware of the benefits and risk of P2P lending so that you can make an informed choice.
What is P2P lending?
P2P lending is not that new; it is a form of direct lending that being around for more than ten years. But its popularity has soared in the last couple of years, and this has seen find its place among the class of mainstream assets. Ideally, this form of lending brings together the investors and borrowers on a single platform. In most cases, this is done online, and that platforms have a high potential of significant returns due to the low operating costs that are void of the expenses associated with the "brick and mortar" branches. The cut in expenses is also attributed to the deduction of fees from the loan payments made.
The advantages of P2P lending?
• Access to higher returns
You have a better chance of accessing higher returns via P2P lending than with conventional saving account or high-street financing option.
• Risk diversification
The P2P platforms allow you to dip your hand into various financing options that enabling you to spread your capital acquisition across different lenders. It gives you better exposure and understanding potential risk and how to manage them. For instance, if you have £2000 spread over 10 loans and a client defaults on one, then potential loss stands at £200. If you have the same amount spread over 100 loans, then the potential loss is at £20.
At the investor, you have the privilege of picking how to lend; it can be clients, for instance, that put forth their business or property as security for the loan.
• Personal Savings Allowance
Interest earned through P2P lending can be reflected in your Personal Savings Allowance. People paying basic-rate tax enjoy an interest of around £1,000 while the higher rate payers enjoy £500.
• Access to your money at short notice
Liquidation of funds before the end of a loan's tenure is possible. However, most P2P lenders agree to this if they can sell that loan position later. But this is not something put on the table by all lenders hence the need to check if such an option is there with the individual platform.
The drawbacks of P2P lending
• Your money is at risk
P2P lending does not enjoy the same risk covers of the FSCS (Financial Services Compensation Scheme) that the mainstream banks do; this is one of the essential risks worth knowing. As such, it is wise to give it some extra thought when deploying your money through any peer-to-peer lending platform. Go for the ones that are clear and upfront about the plans they offer and the risks involved, and what measures they have in place to mitigate the unexpected.
• Time constraints
The diversity of choice afforded to you by P2P lending does have its pitfalls. You need to take some time to evaluate your options, reviews your considerations to make the best pick. This can be time-consuming. You can overcome the time constraints by opting for a managed direct lending platform to complement. Such a platform is more or less a "fund and forget" model that experienced investors pick the loans and diversify options for you.
• Interest is not tax-free
Any interest earned is taxable, except for that of the Personal Savings Allowance. You are expected to declare the interest earned when filing your annual tax returns.
• Your money may not be lent immediately
When you had over your cash to be lent, it will not earn any interest when it is untouched. Fortunately, most platforms strive to have the money deployed a quickly as possible. It may be slow to get lent out, but the minimal impact on the long-term adds up to something worthwhile though not immediate.