Getting started in peer-to-peer lending
P2P platforms allow investors to lend money directly to individuals and businesses. In return, they receive an attractive yield - provided the borrower does not default.
If you are looking to get started in P2P, it is worth considering both the risks and opportunities associated with this nascent sector.
First off, think carefully about what the money is ultimately for. This will determine how much you are willing to commit to P2P, how long you want to lock your money away for and how much risk you are prepared to take. In addition, how does P2P fit with your broader investment portfolio?
Investing in P2P loans is not the same as putting your money in a savings account. There is no guarantee that the cash will be repaid and it is not covered by the Financial Services Compensation Scheme.
Liquidity is a bonus
What’s more, access to your cash may be limited, given that you are committing to a fixed-term loan. Some platforms offer secondary markets for loans and these have functioned well so far.
However, Jake Wombwell-Povey, chief executive of Goji – which aggregates P2P lending opportunities across platforms, points out that most lenders have only been around for a few years. This means that P2P secondary markets have not experienced times of market stress, where there are significantly more sellers than buyers.
He suggests that investors keep in their minds that they will stay invested for the term of the loan. If there is an emergency and they are able to get their money out via the secondary market this should be viewed as a bonus, rather than an expectation.
Before investing in P2P double check you are comfortable with the term of the loan - and if you are in doubt, opt for a shorter time period. Also, consider what kind of lending you wish to undertake.
“Make sure you invest in a way that is coherent to the rest of your wealth. For example, if you are a buy-to-let landlord, don’t lend your money to a bridging platform,” he explained.
Angus Dent, chief executive officer of ArchOver, a platform that specialises in P2P business lending, says: “P2P is a disintermediated process so don’t listen to traditional advisers who too often are still driven by fees, which they don’t earn from P2P lenders. Do your research; there is a plethora of platforms out there so think what security ticks your box; maybe that’s an asset designed to turn in to cash such as a company invoice, perhaps it’s an illiquid asset such as property. Once you’ve sorted the security, then look for a return that suits you. And remember there are no free lunches; the weaker the security, more often the higher the return.”
Each type of loan comes with its own set of risks. For example, business loans are viewed as higher risk than personal loans because P2P companies can access more information on consumers via credit rating agencies. Secured lending means that you have a chance of getting your money back in the event of a default, while this is not the case for unsecured lending. Property development loans also run a higher risk of late repayments.
Investors should think about how specific scenarios could impact each loan type. For example, a spike in unemployment or a property crash.
Diversification across different types of loans and platforms is therefore crucial. Goji, for example, spreads investments across eight P2P platforms.
Neil Faulkner, founder of P2P analyst 4th Way, suggests spreading cash across at least five platforms.
“Keep the proportions of cash evenly split between them. This should help to reduce risk,” he adds.
Mr Dent says: “Take your time and review the market. Once you’re happy with a platform, then start small by investing enough to keep you interested (perhaps the platforms minimum) and then sit back and see whether the platform delivers. If it doesn’t liquidate, if you can, move on. If it does, then begin lending more.”
If you have any doubts about whether to commit cash to P2P, Wombwell-Povey has one final piece of advice: wait for Financial Conduct Authority (FCA) authorisations to come through. Many P2P platforms are still awaiting these. These authorisations will, in his words, provide a ‘watermark of the quality and robustness’ of the business, having survived the regulator’s analysis.
- Part 1 of our brief guide to peer-to-peer lending: Five reasons to consider peer-to-peer lending
- Part 2: Understanding the risks of peer-to-peer lending
- Part 3: Maximising your benefit from peer to peer lending
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.