Five reasons to consider peer-to-peer lending

Published by Danielle Levy on 17 October 2016.
Last updated on 31 October 2016

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.



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