What is Peer-to-Peer Lending And Is It Worth The Investment?

havenifa

havenifa


Posted on: 26th October 2017

Peer-to-peer lending is increasing in popularity. This new technology which allows investors to lend directly to borrowers in the hope of attractive returns, is beginning to stake a claim to mainstream investors. If you’ve got money to invest, is it worth investigating?

What is Peer-to-Peer Lending?

Peer-to-peer lending (P2P) is a method of debt financing that enables individuals to borrow and lend money. The key to it’s success is that it dispenses with the use of an official financial institution as an intermediary. Lenders go direct, and in theory, get direct investment results.

Currently, the P2P sector represents just a tiny proportion of the broader UK investment landscape. However, the amount lent through P2P platforms has grown dramatically in recent years. In 2016 UK P2P investments reached £3 billion, according to Moneywise.

P2P Products – not just for millennials

P2P is powered by technology. Platforms like Upstart, Funding Circle and Prosper Marketplace pride themselves on their simplicity, speed and ease of use. They are also not solely aimed at tech-savvy millennials or the mobile generation, in fact the opposite is true. Research conducted by Nesta in 2014 revealed that more than 55% of individual investors in P2P are aged 55 or over, with only 12% under 35. This is understandable, after all, how many under 35s have the disposable cash for investment, compared with over 55s?

P2P Investments growing up

Another factor leading to more P2P investments is that investors can include eligible P2P investments within their ISA. As a result of this, many financial advisers, who are a naturally cautious group are beginning to explore P2P as a useful diversifier away from the volatile stock market. This is also buoyed by the entrance of more established players into the sector.

A good example is Octopus Investments – a long standing investment company, who last year began distributing a P2P product, Octopus Choice. Designed for both retail investors and financial advisers, it has seen more than £75 million invested on behalf of over 4,000 investors, among them 500 financial advisers and their clients.

Are Their Risks with P2P?

Of course it’s not all roses in the garden. There have been some high profile cases in the press where P2P investors have not received their promised results, and some cases where investors have lost out.

Risks exist and P2P lending is not for everyone. Investing in loans places capital at risk, as investments aren’t protected by the Financial Services Compensation Scheme and instant access to your money can’t be guaranteed. This is why it is doubly important for investors and advisers to research the options before deciding if P2P is right for them.

With such diversity available through P2P it is important to be aware that each product carries a different level of risk.

For example, with property lending, there is still a risk you could get back less than you put in, but as the loans that are backed up by property there is arguably less risk than lending to individuals on an unsecured basis. This is because property can always be sold and used to fund some or all of the debt, though it could mean it takes some time to get your money back.

For investors who are looking to avoid the fluctuations and volatility of the stock market, property-backed lending could be a very interesting option.

Should I Look At P2P?

P2P lending is not without its unique risks. In today’s environment, while interest rates remain low, and with rising inflation and stock market volatility, an option such as property-backed P2P could play a useful role in the investor’s portfolio.

For more information about your investment strategy, talk to us at Haven for impartial advice to secure your future.