Is social lending safe and does it make sense?

8 March 2012

Q

There are a number of social lending companies offering high rates of return for investments associated with loans to companies. I’m interested in social lending but can you tell me what kind of a risk I would be taking?Are these companies trustworthy and would my investment be protected by the Financial Services Authority or any other body. And is social lending a better option than a stocks and shares ISA?
From
GB/Lytham St Annes

A

Investments such as these should be considered niche and are rarely suitable for the novice investor. They have become increasingly popular largely due to the record low level of interest rates and the restrictive lending criteria adopted by many banks.

Some of the risks are that assessing a company’s potential, its past performance and anticipated returns is difficult. Also, you would not receive protection from the Financial Services Compensation Scheme if anything were to go wrong.

I would not dissuade everyone from investing this way but, as a general rule, annual ISA allowances should be utilised first. If you are going to invest, do so initially with only a small sum that you are not reliant upon.