Five reasons to consider peer-to-peer lending
Keen to find out more? Here are five reasons to consider P2P lending:
1. Savings accounts disappoint
In the low interest rate world we find ourselves in today, the interest rates on offer from savings accounts continue to disappoint. According to Moneyfacts, the average easy access account rate is 0.43%, which means that many savers are seeing the value of their money eroded by inflation over time.
2. P2P returns look attractive
In contrast, P2P lending can generate inflation-beating returns of between 5% and 9% – depending on the type of lending that is undertaken. It is a good idea to invest across a number of P2P platforms, so you have exposure to different types of loans and borrowers. This helps to minimise the impact of any defaults.
Zopa, for example, offers returns as high as 6.5% a year (after bad debts) for unsecured personal loans that are not protected by its Safeguard fund, which pays out in the event of borrowers defaulting.
Meanwhile, Funding Circle provides secured and unsecured loans to businesses, quoting an estimated return of 7.5% a year. Business loans are viewed as higher risk than personal loans because P2P companies can access more information on consumers via credit rating agencies.
In comparison, JP Morgan Asset Management forecasts a return of 7.25% from UK equities in 2016.
3. Diversify away from the stock market
P2P also provides investors with an opportunity to diversify away from traditional asset classes, such as equities and bonds.
P2P sits somewhere between savings and shares in terms of the risks and rewards on offer, according to Andrew Lawson, chief product officer at P2P platform Zopa.
“We have found that a lot of people are frustrated with the returns they are getting on traditional deposits, but they also feel nervous about getting involved with the stock market. P2P sits somewhere in between,” he explains.
Angus Dent, chief executive officer of ArchOver, a platform that specialises in P2P business lending, says: “P2P lending provides investors with a return with security in the short term, one year to three. That said, always build a portfolio of loans. A stock exchange provides lenders with the fantasy of higher returns, sometimes great losses, and usually a return of 7% over a much longer term.”
4. P2P is growing and becoming more accessible to investors
Between 2005 and the end of June 2016, 150,000 people had lent close to £5.8 billion via P2P platforms, according to the Peer-to-Peer Finance Association.
Neil Faulkner, founder of P2P analyst 4th Way, notes the P2P market has continued to roughly double in size each year and has potential for further growth - as long as P2P lenders continue to provide competitive rates to borrowers.
The launch of the Innovative Finance Isa this April allows investors to hold peer-to-peer loans in a tax-free Isa wrapper. Many expect this development will attract new income-hungry investors to the sector.
Richard Wazacz, head of P2P lending platform Octopus Choice, predicts it will soon become easier to hold P2P loans in Sipps, which could provide another boon for the sector.
5. P2P is helping the economy
In an environment where banks have withdrawn funding for small businesses, property developers and entrepreneurs, P2P lenders play an important role.
“We should champion anything that can provide a sustainable and fair lending proposition to UK plc. We need economic growth and at the moment the banks are not helping,” explains Mr Wazacz.
- Read part 2 of our brief guide, Understanding the risks of peer-to-peer lending.
- Read part 3 of our brief guide, Maximising the benefits of peer-to-peer lending.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).