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Peer-To-Peer Lending: Is It For You?

February 2016

What is Peer-to-peer lending?

Peer-to-peer lending is the practise of lending money to unrelated individuals and businesses. Peer-to-peer platforms enable both parties to bypass the bank, giving the lender increased headline rates and the borrower lower repayment rates. There are a steadily increasing number of websites that act as the “middle-man”, undergoing stringent credit checks and taking care of the legal documentation – their fees are consumed by the borrower which gives the lender the added benefit of no up front costs

How does it work?

Peer-to-peer lending works by eliminating the need for a bank loan and giving normal investors the chance to put their money into a business idea. The investor uses a third-party company to match them with a borrower, agrees the terms and conditions of the loan and then sets the borrower off to make their money work.

Who can invest?

If you are thinking about alternative ways to invest your money with the risk of a higher return, you’ll be pleased to know that anyone is able to invest in Peer-to-peer lending. The minimum investment taken from the leading Peer-to-peer lending companies is just £10 so this investment method is open to everyone. Compared to the safer forms of investment, a study by Assetz Capital found that Peer-to-peer lending performed significantly better than GILTs, Bonds and even Commercial Real Estate. A typical return on a 3y GILT for high net worth individuals presented a yield of around 1%, whereas a levered active Peer-to-peer portfolio returned over 10% for the investor.

Is it popular?

The Peer-to-peer lending market is becoming an ever popular way of raising and investing capital. The UK recession was a big factor in helping the concept become more established, with the banks reducing the amount of loans they were giving, borrowers were turning to Peer-to-peer companies to help them find investors in their business ideas and ventures.

Is it for me?

It is important to understand the risk that are associated with Peer-to-peer lending. The more traditional forms of savings and investment are protected, either against an asset or in the case of savings accounts guaranteed by up to £75,000 by the FSCS scheme. Many of the companies that source the borrowers offer stringent checks and security assessment to minimise your exposure to risk.

Pros & Cons



Much higher rate than average savings account returnCash isn’t covered by FSCS
Diversify where you invest your moneyYou may have to lock up your funds for at least a year
P2P is now covered by FCA regulationTax won’t be automatically deducted
Schemes offer their own protectionP2P providers sometimes charge an annual fee of around 1%
You can sell early through the secondary marketYou may not find a suitable investment instantly

Second thoughts? There’s always the Secondary Market

The Aftermarket is a secondary market that allows lenders who have already loaned money to sell on part or all of an existing loan to a new lender. Selling your loan on can be subject to a small fee, Funding Circle charge 0.25% to sell on a loan. The secondary market offers the potential to create liquidity if a lender needs to recover their loan before their expected repayment.

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