For the average saver, using a savings account or cash ISA is the most popular option as they appeal to people who wish to keep their hard-earned money safe. Many will never have considered investment due to fears about unpredictability and risk. But the low annual interest rates of high street banks’ savings offerings mean that you could be missing out on making your money earn for you. This is where peer-to-peer lending comes in – investing in businesses selected by peer-to-peer platforms offers better returns, but also comes with its risks which lenders must consider.
Putting your funds into savings accounts could actually lose you money. While the UK inflation rate is currently -0.1% (BBC), the Bank of England have forecasted that UK inflation will rise above 2% in the next two years, meaning that if your savings account or ISA has an interest rate of less than 2% you will be losing money overall. In August 2015 the average return for a cash ISA was 1.43%, the lowest since 2011 (BBC), and savings rates are likely to remain low while the Bank rate stays at 0.5%, unchanged since 2009.
Returns from peer-to-peer investments are much higher as there is no banking middleman involved. You have greater control over your money – platforms offer a selection of loans with different levels of risk and interest rates, and you can choose which businesses to lend to, how much to invest and at what rate. Remember – these higher returns come along with a greater level of risk as borrowers may default on a loan and you may not get your money back.
The risk of losing money is a major reason putting people off benefiting from higher peer-to-peer returns, instead keeping their money in the security of savings accounts. While this risk does exist, peer-to-peer platforms have mechanisms in place to reduce it as much as possible. LendingCrowd has a highly experienced Credit Assessment Team and stringent credit processes in place which ensure that only credit-worthy borrowers have loans listed on the platform. Our Credit Band system informs investors what the risk of lending to each borrower is, with higher risk loans providing higher levels of interest, meaning that investors can choose to balance the level of risk they wish to undertake with their desired interest rates.
If a business ceases trading, LendingCrowd will take the necessary steps to recover the maximum amount possible of the loan, however investors’ capital is at risk in all investments as funds may not be recovered. Many platforms including LendingCrowd also encourage investors to diversify their investments to reduce the risk of losing their money, an effective strategy involving investing in many different loans over different risk bands rather than lending one large sum to a single business.
Withdrawal and investment
With peer-to-peer lending your cash may not be as easily accessible as withdrawing it from an ISA if it is invested in business loans which have not been fully repaid. However, LendingCrowd allows you to sell parts of loans on the secondary market to other investors, freeing up capital to either invest in other loans, or to withdraw your money when you wish. In comparison to easy-access savings accounts, withdrawing your money from P2P investments is a more involved process. But for many this downside is balanced by the availability of higher returns, especially as many of the highest interest rate ISAs also have restrictions on the number or monetary amount of withdrawals within a certain time frame, or require a high minimum deposit of funds. Most peer-to-peer platforms only require small minimum investments (the minimum bid is £20 with LendingCrowd), putting you more in control of your investment choices.
New developments in peer-to-peer lending are making it a more secure and attractive option with less risk and more reward. In 2015 114 peer-to-peer platforms applied for full authorization by the Financial Conduct Authority (FCA), which will put stricter regulations on all peer-to-peer lenders, making it a safer option for investors.
The UK summer budget also had great news for peer-to-peer lending; from April 2016, peer-to-peer returns will be tax-free when investing through an Innovative Finance ISA – another great reason to start investing some of your savings instead.