In previous years, those who wanted to grow their money would put it in a savings account such as an ISA. It was safe and offered a good return on the investment. While those who had a little more to invest would buy shares in different companies at the risk of losing some, or all, of their investment in return for potentially big rewards.
Jump forward a couple of years and we find interest rates have fallen beyond belief and investors are looking for new ways to grow their money. Hence the rise of peer-to-peer lending. Nowadays, lending money to small businesses with interest has become so successful that we ask the question: is it better to lend money to a company, rather than buy shares in it? Let’s look at the facts:
Length of investment
If you buy shares in a company, you should see it as a long-term investment. Prices can fluctuate a lot short term, so it’s important to be able to commit your money for several years. There is no set amount of time involved and you can sell your shares whenever you like.
However, with peer-to-peer lending you have to commit your money for a set amount of time i.e. the term of the loan. This can vary but is usually between two and three years. If you want to withdraw your money before the loan is complete, you would need to sell your part to someone else.
Accessing your money
If you own shares in a company, you have to sell them before you can access your money. Normally you would wait until a time when your shares are worth more than what you paid. However, there’s no guarantee how long this will take, if it happens at all. So, if something unexpected were to happen, and you needed access to your cash in a hurry, you might be forced to sell your shares for less than you paid for them.
With peer-to-peer lending, you can access your uninvested money whenever you like. However, if your money has been allocated as part of a loan, the only way to access it is to sell your loan part to another lender. Most lending platforms have the facilities to do this in place and it can be done quickly and easily.
When you buy shares in a company, the only way you’ll see a return on your investment is if the share prices go up; ‘if’ being the operative word. However, compared to peer-to-peer lending, there is the potential for higher returns which can be very attractive to lenders looking to make their money work harder.
With peer-to-peer lending interest rates and loan amounts are fixed. Once a loan is agreed, the lenders will then receive set monthly repayments from the borrower. This could be just the interest, or the interest plus a little part of the money lent. Unlike shares which can rise and fall unexpectedly, peer-to-peer lending offers a steady rate of return, which can help you plan for the future. And with interest rates of between 5.95% to 12.25% up for grabs, it’s no wonder that more and more people are turning to peer-to-peer lending as a way of growing their money. Just remember, unless you re-invest the interest you receive, you won’t benefit from any capital growth.
Both options carry risk but with shares it’s significantly higher. If a company fails and your shares become less than what you paid, there’s nothing you can do about it except to cut your losses and move on.
With peer-to-peer lending, on the other hand, the level of risk is lower. All new businesses are meticulously assessed and only those with great credit ratings are accepted for investment. What’s more, many lending platforms have procedures in place to protect your investment and regain as much money possible from a bad investment. However, your money is still at risk. Currently, peer-to-peer lending is not protected by the Financial Services Compensation Scheme (FSCS), so the money that you lend to a borrower is not protected and if they default on the loan you risk losing your investment in that company.
The way to minimise risk, for both shares and peer-to-peer lending, is to diversify your portfolio. In other words, spread your investments over several different companies. That way if one failed, your return won’t be too badly hit.
So, what’s the verdict?
Shares vs. Lending: they’re both viable investment opportunities. Peer-to-peer lending is fast becoming one of the best ways to grow your money in today’s world, however, it doesn’t have the same potential as shares. But by lending money to an established individual, or small business, you’ll see a decent monthly return as the loan is paid back at a high-interest rate.
Exciting new companies, or startups, won’t appear on peer-to-peer lending sites, so the only way to get onboard is to buy shares in the company. However, there’s no guarantee they’ll become the next Twitter or Innocent (or that you’ll even make a profit). Do you really want to take that risk? Basically, whether you invest in the stock market or lend through peer-to-peer websites, it all depends on what you’re most comfortable with. More and more people are turning towards peer-to-peer lending because it offers less risk, as well as giving them a great return on their investments.