Following our recent article on the introduction of the new Innovative Finance ISA, enabling consumers to invest some or all of their annual ISA allowance into Peer-to-Peer funding platforms, we take a closer look at what Peer-to-Peer (P2P) lending is and whether it’s worth considering as an alternative option to more traditional investment channels.
Also known as ‘crowd-lending’, Peer-to-Peer websites provide a platform for matching borrowers with lenders, with the main USP being that, with no banking intermediary, borrowers often get slightly lower rates and savers get much improved returns. The concept grew dramatically following the financial crisis, with Zopa being the first brand to launch back in 2005. The sites themselves make money via a fee for providing this ‘matchmaking’ service.
|SAVINGS INTEREST VS PEER-TO-PEER PREDICTED RETURNS (BEST RATES AT SEPTEMBER 2017)
Source: (1) Ratesetter (2) Ratesetter
Whilst the concept appears to behave like a savings account with much higher returns than traditional UK offerings, with no savings guarantee they are, in reality, very much an investment, and come with all the inherent risks of investing too.
As crowd-lending has grown in popularity, several new providers have entered the market – see links at the end of this article. However, three key players have dominated the industry, holding two-thirds of market share between them. The key difference between them is how they mitigate your risks as a lender – the greater the risk, the high the return, and vice versa.
With £80m invested by the UK Government, Funding Circle is the purest Peer-to-Peer system lending to businesses. All investors must use their auto-bid system, whether they choose the Balanced option, which lends to businesses across the full risk rating spectrum, or the Conservative option, which only lends to the two lowest risk classes of businesses, meaning both returns and risks are lower than the Balanced option. Whichever option you choose, no more than £100 and no more than 0.5% (min £20) of your money will be leant to any one single business. All loans are repaid on a monthly basis and debts can be sold to other investors on the secondary market should you wish to access your money early.
The first P2P lender to launch, Zopa began with just £1.5m in loans back in 2005, rising to £3.2bn in 2016. In 2013 Zopa changed the way it worked, offering investors a fixed rate of interest depending on how much money they wanted commit and for how long. Like Funding Circle, Zopa offers two products, both of which spread your money into £10 mini-loans across various borrowers; Core lends to borrowers with a risk rating of A* to C (the lower end of the risk spectrum) and has a projected annual return of 3.9% after fees and bad debts with a 1% fee for withdrawing early, whilst Plus offers higher projected returns of 6.9% but lends to borrowers across the full risk rating spectrum making it a riskier choice.
Until June 2017, Zopa also had a Safeguard fund in place, which meant that if a borrower failed to repay their loans, an investor would still get their money back. This has now been withdrawn. Again, returns are re-paid monthly and can either be withdrawn or re-loaned out to another business. Early withdrawal of your money will be subject to a 1% fee.
As of August 2017, Ratesetter is no longer a member of the Peer-to-Peer Finance Association, as it breached the trade body’s transparency rules. However, before it withdrew, it operated in a similar way to Zopa except that, rather than offering fixed rates of return, investors could choose to customise their rates of interest depending on how long they were willing to wait for their money to be lent out.
Ratesetter also had its own version of Zopa’s Safehuard fund, called a Provision Fund, which protected the rate investors were given when they put their money in. To date, the fund stood at £20.5m. For early withdrawal, investors could use its ‘Sell-Out’ function, but this was subject to a fee which averaged at a much higher rate of 2.51%.
As mentioned earlier, whilst these are the three biggest lenders, they aren’t the only ones in the market. Other members of the Peer-to-Peer Finance Association include ThinCats, MarketInvoice, Lending Works, Landbay and Folk2Folk.
For more information about investing in Peer-to-Peer lending, please speak to your Finura Partners adviser.
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