11 February, 2016

P2P Lending: Best Investment of 2016?

Peer-to-peer lending has shot to fame in its 10 years in existence. Since being created in 2005 in the UK by Zopa, peer-to-peer lending growth has risen dramatically, resulting in a cumulative market value of £4.4bn by Q4 of 2015. With the number of peer-to-peer lenders in the UK market exceeding 50, P2P lending is now deemed one of the best forms of investment, but is it an asset class that you will be investing money in?

(P2PFA data)

Here we will take a look at peer-to-peer lending, the risk involved and how it’s mitigated to establish if this is one of the better investment opportunities for you, the investor.

Peer-to-peer lending risk v reward

As interest rates go, peer-to-peer lending exceeds those on offer from most asset classes. The stock market has taken a hit this last year, with many markets in a “bear” territory – market prices falling encourage the selling of shares – falling 20% and with bank interest rates (Bank of England) at a historic low of 0.5%, P2P lending could be a new way of investing money and earning those returns in the region 5% per annum avg. What risk is associated in order to achieve these returns? Let’s evaluate:

Borrower default: how the risk is mitigated

The no.1 risk associated with peer-to-peer lending is a borrower defaulting on their loan and you losing all of your money. P2P lending is not covered by the Financial Services Compensation Scheme either so there is no compensation if your money is lost. Here are the key safety procedures imposed by P2P platforms to mitigate this risk:

1. Asset security

Many UK peer-to-peer lenders, such as Wellesley & Co, secure their loans with tangible assets that can be sold to repay investors should a loan default.

2. Provision fund

RateSetter were the first to introduce a safeguard, or provision fund, but most major P2P platforms have followed suit. The fund will pay out on borrower defaults at the discretion of the Directors (in many cases) and assuming the fund is of adequate size.

3. Diversification

The number one rule when investing: diversify. With peer-to-peer loans your investment is spread across a number of borrowers, ensuring not all your eggs are in one basket. This spreads the risk and mitigates a single borrower default affecting your capital investment. RateSetter and Zopa retain very low default rates due to spreading a single loan amongst hundreds of borrowers.

4. Strict lending criteria

All UK peer-to-peer platforms will boast a rigid and robust lending criteria. The fact of the matter is, you yourself will rarely see who it is you are lending to. Transparency is key, and with major UK P2P platforms making it clear your investment is ‘auto-diversified’ between individuals, property and SME business loans, you can be sure they adhere to extremely strict rules, lending to only creditworthy borrowers. Christina Farnish, Chairperson of the P2PFA announces industry default rates are at a lowly 2-3% presently. This is in addition to the industry falling under FCA Regulation, which enforces strict rules when lending and can sanction and fine platforms if they breach regulation.

High interest rate reward

So it’s clear that peer-to-peer lending can offer one of the best saving rates (if deemed saving rather than investment) around so let’s take a look at what you could earn if you took your April ISA allowance, invested it an Innovative Finance ISA (IFISA) and lent through P2P lending:

  • Peer-to-peer lenders act as ISA Plan Manager
  • Open an IFISA with a given P2P lender
  • RateSetter 6% per annum annualized rate IFISA (E.G)
  • £15,240 ISA allowance can be invested
  • Interest received is tax free

So, you could receive £914.40 tax-free interest in one year. Not bad.

Innovative Finance ISA (IFISA)

The ‘peer-to-peer ISA’ as some are calling it requires a closer look, seeing as it is new and there’s some complexity regarding withdrawals and transfers; find out more here. You can, of course, invest in products outside of the IFISA, but be sure to compare the many platforms and products on offer by visiting Orca Money, the no.1 peer-to-peer comparison service in the UK.

Peer-to-peer lending comparison

At Orca Money we list some of the major peer-to-peer lending UK platforms in operation, offering a diverse range of products offering the best interest rates on the market.

Wellesley & Co platform profile

Property based lending platform offering auto-diversified asset-backed investments, returning 3% – 6% per annum (depending on product).

Landbay platform profile

Buy-to-let mortgage lending platform offering auto-diversified asset-backed investments, returning 4% – 4.5% per  annum (depending on product).

Saving Stream platform profile

Manual loan selection, property investment platform returning 12% per annum average.

Assetz Capital platform profile

Property, SME and energy efficient project investment platform offering auto-diversified and manually selected loans, secured and unsecured, returning 3% – 19% per annum (depending on product).

Rebuilding Society platform profile

SME business lending platform offering secured and unsecured loans, where you manually select loans, returning 14% – 18% per annum (depending on loan selection).

Crowdstacker platform profile

SME business lending platform, where you manually select loans, returning 6.4% – 6.8% per annum (depending on loan selection).

Crowd2Fund platform profile

SME business lending platform, where you manually select loans, returning 8.7% per annum average (depending on loan selection).

PropLend platform profile

Manual loan selection, commercial mortgage lending platform, returning 6% – 9.5% per annum (depending on loan selection).

ThinCats platform profile

Manual loan selection platform, facilitating investments in established UK businesses, returning 9% per annum average.

Compare peer-to-peer lending platforms and products

It’s critical you research this asset class carefully, and compare the various platforms and products on offer. You can do this with confidence at Orca Money.