In 2017 the Financial Times newspaper described P2P lending as “arguably the fastest growing retail investment product of the past 10 years”. That’s quite a claim, but there is certainly plenty of investment in the sector to back it up.
Its popularity is mainly down to the fact that over the past few years it has shown that as an asset class it can provide much higher returns than those of banks and other traditional high street financial lenders. To the extent, in fact, that it has become a common contributor to many a UK investment portfolio these days.
But as an investor who has perhaps never used a P2P investment scheme in the past, what do you need to be aware of when deciding which particular platform to choose?
What is the particular model the platform is using?
It could be one of three different P2P platforms, such as:
Conduit: investors choose which loans they want to fund. They then negotiate interest with the borrower directly.
Pricing: investors also pick which loans they want to fund, but the platform does the rate negotiating.
Discretionary: the platform allocates the investor’s money into a portfolio of loans and does the pricing for him or her.
What have past net returns looked like?
In other words, what has the performance to date been like? Don’t just look at the net returns though, how often has a loan been repaid late? Then again, what do the default rates tell you? Often loans can run from 1.5 to three and five years and any loan which remains outstanding will always be at risk of default.
How much investment diversification does it offer?
When investing passively in a P2P platform the investment is split between a number of different borrowers. This makes the investment automatically less at risk if one borrower defaults. All platforms divide the cash differently though – one platform gives each borrower just £10, meaning an investor could be lending to thousands of individuals.
Does the platform lend to a sector where loans can be underpinned?
A classic example of this would be a P2P platform which invested in property. It means that if a borrower were to default, the property in question could be sold and the investor compensated in that way. This is an important issue since, unlike unit trusts, cash and some other investments, P2P platforms don’t qualify for the Financial Services Compensation Scheme and your capital is at risk.
What are the charges to join the platform?
Some platforms charge the borrowers to join, others take a percentage of the loan interest (which could entice them to put investor’s money on more riskier loans!).
What is the minimum amount you can invest?
This can vary from platform to platform – some ask for as little as £10, while many want a minimum of £1000 per investor.
Find out about our own Sourced Peer2Peer lending platform here.
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