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What can I do with my money? |
Peer to Peer Lending (P2P)
What is Peer to Peer Lending (P2P Lending)?
P2P Lending is another way of investing your money by lending to businesses. The businesses who borrow this money register on P2P providers, are vetted and given a rating by P2P platforms. The borrowing businesses generally opt for P2P lending because if they go to a bank they would have to pay very high interest rates. By using P2P lending platforms, these business are able to borrow money from investors like yourself at an agreed rate.
How does it work?
I have been using Funding Circle since 2015 and they currently provide a return of 10%. As an investor you choose the amount you want to lend and any borrower has to pay interest every month for the duration of the term they have your money. Once the term (e.g. 24 months) is up, you get back your full investment. Funding Circle also has the option to ensure that all your interest is reinvested so that you can benefit maximally from compounding effects. Different P2P platforms offer different set-ups which you can read about when you access them. P2P providers are relatively new, have user friendly apps that are simple to download use and understand.
Diversification
If you have £100 to invest on these P2P platforms, you can lend that amount to 20+companies meaning that each company can get £5 or less of your investment. Some P2P platforms allow you to choose who to lend to. Others do the lending for you where you set a cap on the maximum amount of money that is lent to any single borrower. That way, if any single borrower defaults, your loss is minimised.
If you go for a platform that allows you to choose a lender there are certain things you need to keep in mind.
Hold your P2P investments in an Innovative ISA tax free!
Investments you make in a P2P portfolio can be held in an Innovative Finance ISA (IFISA). This ISA along with Cash, H2B, LISA all contribute to your annual limit which is £20,000 for the 2018/2019 financial year. This means that the total amount you have across all 4 ISA accounts cannot exceed £20,000 without paying tax. By using the IFISA wrapper you do not have to pay any tax and you get to keep more of your money. Hurrah for income protection!
How can I get my money back?
Read the terms provided by your chosen P2P lender for more information.
List of peer to peer lending providers
P2P Lending is another way of investing your money by lending to businesses. The businesses who borrow this money register on P2P providers, are vetted and given a rating by P2P platforms. The borrowing businesses generally opt for P2P lending because if they go to a bank they would have to pay very high interest rates. By using P2P lending platforms, these business are able to borrow money from investors like yourself at an agreed rate.
How does it work?
I have been using Funding Circle since 2015 and they currently provide a return of 10%. As an investor you choose the amount you want to lend and any borrower has to pay interest every month for the duration of the term they have your money. Once the term (e.g. 24 months) is up, you get back your full investment. Funding Circle also has the option to ensure that all your interest is reinvested so that you can benefit maximally from compounding effects. Different P2P platforms offer different set-ups which you can read about when you access them. P2P providers are relatively new, have user friendly apps that are simple to download use and understand.
Diversification
If you have £100 to invest on these P2P platforms, you can lend that amount to 20+companies meaning that each company can get £5 or less of your investment. Some P2P platforms allow you to choose who to lend to. Others do the lending for you where you set a cap on the maximum amount of money that is lent to any single borrower. That way, if any single borrower defaults, your loss is minimised.
If you go for a platform that allows you to choose a lender there are certain things you need to keep in mind.
- Rating: P2P providers vet each borrower and assign a rating. A high rating which could be 'A' means that this borrower has a low probability of defaulting of their loan. Another borrower can have rating 'D' which means that they have a higher risk of defaulting and therefore will pay a higher monthly interest to lenders.
- Term: Each borrower specifies how long they think it will take them to pay all the money back. This can range from 4 months to 5 years plus.
- Interest: Each borrower will set an agreed interest rate that they will pay each lender. These rates will vary according to the borrowers probability of defaulting
- Information about the company: P2P providers typically provide a summary of the borrower business information. This can include the name of the owners, their sector, and how long they have been active.
Hold your P2P investments in an Innovative ISA tax free!
Investments you make in a P2P portfolio can be held in an Innovative Finance ISA (IFISA). This ISA along with Cash, H2B, LISA all contribute to your annual limit which is £20,000 for the 2018/2019 financial year. This means that the total amount you have across all 4 ISA accounts cannot exceed £20,000 without paying tax. By using the IFISA wrapper you do not have to pay any tax and you get to keep more of your money. Hurrah for income protection!
How can I get my money back?
- Wait until the term of the loan has ended
- Sell your loan to other lenders (if this option is availble)
- Rather than automatically reinvesting your interest, you can change the setting on your P2P account to get your interest in cash
Read the terms provided by your chosen P2P lender for more information.
List of peer to peer lending providers
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Disclaimer
The content on WealthSquats are my own thoughts and is not financial advice. Consult certified financial experts to get information that is suitable to you.
The content on WealthSquats are my own thoughts and is not financial advice. Consult certified financial experts to get information that is suitable to you.
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