With Peer-to-Peer (P2P) Lending ISAs fast approaching, it is likely that many more people will start considering this kind of investment. Some may be those who are altogether new to investment and keen to get more out of their savings. Others may be more experienced investors who have never seen a need for P2P in their portfolio, but have been attracted by the prospect of tax-free status. If you are considering putting money into P2P once the new ISAs are launched, there are a few basic facts you need to know.
What is P2P?
Peer-to-Peer companies specialise in matching people who want to borrow money with those who want to invest. Through the intermediary of the P2P lender, you simply provide your funds to a borrower and they pay you back with interest as they would any other loan. As interest rates on loans are much higher than on savings accounts, P2P firms can offer both competitive rates to borrowers and attractive returns to lenders while still taking a cut for themselves.
Exact rules vary between providers, but it is possible to start lending with as little as £20 or even less. This is because many loans are essentially “crowd funded,” with a number of investors clubbing together to make up the total amount the borrower has requested. Obviously you will have to invest far, far more than £20 to see worthwhile returns but having such a low limit is useful for those who want to test the water with minimal exposure in the beginning.
How Risky is It?
One of the attractions of P2P is that it is considered a fairly low-risk investment, especially for the levels of returns that are on offer. It has been described as “not much riskier than a bank,” making the upcoming P2P ISAs all the more attractive to those who are essentially seeking an alternative to a cash ISA. Most P2P platforms have policies in place to ensure you get your money if a borrower doesn’t repay. You can usually see information about a borrower’s credit history or some other indication of risk level, such as a grade assigned by the P2P platform, so that you can choose a level of risk you are happy with.
However, some experts have voiced concerns that P2P may get riskier after the new ISAs are launched. Currently, many platforms have quite robust criteria for borrower acceptance, or else a clear grading system to help investors identify riskier borrowers. The new ISAs are expected to bring in a lot of new investors, and P2P platforms will have to provide borrowers for them to lend to. If they cannot source enough new business using their current criteria, some fear they may have to lower their standards in order to maintain the balance.