What is called peer-to-peer lending (P2P) is the practice of lending money to individuals who wish to borrow money but often find difficulty in obtaining the necessary funds from a bank.
Through lending firms such as Zopa, Ratesetter or Funding Circle often offer a return of 7% on your investment. There are also risks for which you should be aware before lending your cash to a borrower. Here, we hope to guide you through this hybrid form of investing your savings, how it is done as well as the regulations governing these loans. And of course, there will be risks which we’ll explain as well as how to protect yourself against them.
The uncertain future of Brexit may have a direct impact on peer-to-peer lending
Of course, we still don’t know just what Brexit will mean as concerns our economy. Some believe this will be a good move while others emphatically disagree. This is, of course, a very uncertain situation.
Just what is peer-to-peer lending?
As mentioned above P2P lending is you, the lender will be lending money to other individuals or companies. P2P lending websites are your online financial matchmakers. Some of these are of industrial size. These matchmakers play cupid in that they match lenders with borrowers.
Many individuals, as well as companies, are willing to set sums of money aside in the hope of putting it to work for them.
Sometimes this form of lending is referred to as crowdlending.
Since there’s no banking “middleman’s” fees, a borrower can usually obtain a lower rate for the amount of money borrowed. The lender on the other hand usually earns a return on their loans much better than that offered by traditional savings in a bank.
Now while P2PS seems to be a savings account, you should be prepared to understand that there’s no guarantee that your money will be protected and therefore the possibility exists that you could lose part or all of your money.
Lending, however, isn’t without its guidelines. Potential borrowers are selected through credit checks and therefore rated in advance according to risk.
As with any investment scheme, the more profit to be gained, the riskier the investment and the more chance that you may lose. However, if you find yourself in the position of having extra money as many professional people do, if you’re debt-free and are ready to invest some of your money in a long-term loan, then our suggestion is that rather than diving in headfirst, you might find it wiser at first to dip your toe into the water. You might put a small amount of money into the market and allow yourself time to get used to it. You should bear in mind the fact that each website will have a different method of approach to this subject.
Despite that P2P lending isn’t savings in the traditional sense, you should remember too that you do have one, and only one, personal savings allowance in each tax year. Therefore, any interest earned that would exceed this allowance means that you’ll have to pay tax on it. You can get more information on this subject.
It’s very important that you understand the risks involved with this type of investment. There’s always the risk that you’ll never see your money again. Although P2P lending has worked out well for many investors, there always remains the possibility of never seeing your money again. Each website uses different criteria for the investor to allow room in advance to determine the risk involved in a particular loan. You should understand what a particular website’s conditions are.
You may find it difficult to withdraw your monies early
Another possibility that should be considered is that it may difficulty in withdrawing your investment early.
Many P2P lenders do allow the investor to withdraw funds early by matching your existing loan with that of a new investor. Sometimes this will work well, although not always and there remains the question of how a rise in interest rates would affect this loan.
For example, you’ve lent your money at 4% and want an early exit. Newer investors are lending at as much as 9%. Your loan at 4% would be very unlikely to attract any investors.
The rate lenders quote on a given date isn’t guaranteed
While the lenders in this guide have quoted their expected rates of interest, the actual rate could be less. Id a part of your loan isn’t repaid – without a provision fund to cover this – or if a borrower repays a part of your loan early.
Peer-to-peer lending is now being regulated
Those who use P2P now have more protection than in the past. Starting the first of April, 2014 the P2P industry began a regulation by the Financial Conduct Authority.The rules of the Authority state clearly that peer-to-peer companies have an obligation to clearly stare all information, to point out risks and have a scheme in place in the event that something goes awry. These obligations are intended for all firms, large or small.
At this time, a P2P firm must have at least £50,000 in capital (for larger companies may have to have an even greater reserve). This would ensure that the company will be able to hold up during financial difficulties.
Another consideration is that your cash may not be lent straightaway due to lack of demand or eligible borrowers. This would mean that during this period your funds would earn nothing.It may take days or weeks to find a borrower that would be suitable for your funds. If you’re investing a good lot of monies, you may have to wait even longer to see all your funds being lent out to eligible borrowers. And there’s no savings scheme in place t guarantee your funds.
If a P2P firm should fail, what would happen to the monies you’ve lent out?
In the most basic terms, these loans are essentially private transactions between you and the borrower. Therefore, if your P2P should fail, your loan would still be in effect. Now, all firms that belong to the Peer to Peer Finance Association must have insurance to pay for third party collection. If this unfortunate event should occur, however, it is unlikely that things would go as smoothly as you might hope.
The Mysterious Unknowns
Coming out of the United States as well as with some of the smaller firms in the UK, we’ve heard some truly frightful stories of bad transactions, improperly run P2P firms and other irregularities. You must bear in mind that P2P lending is a relatively new industry so the future is difficult to predict with any certainty.The takeaway here is that you should take plenty of time to consider your money, study the P2P industry carefully and then decide whether you feeling the risk is worth taking after all.