It has recently come to my attention that peer-to-peer lending (P2P) is becoming one of the popular ways for those of us with retirement in mind to add to our income. According to statistics from AltFi Data, British citizens have invested £10 billion in this form of lending in the last decade and have received on average 7.17% gross interest.
P2P lending bypasses the banks
Why are people interested in P2P? Largely because it allows borrowers to bypass the banking system, which in recent years has not been terribly forthcoming with loans, especially for small and medium-sized businesses. The idea is that both borrowers and lenders get a better rate: lenders receive more interest than they would get from a bank savings account, while borrowers pay less than on a bank loan.
An article in the Daily Telegraph also reports that P2P investments are now at the same level as the more conventional stocks and bonds, indicating that more ‘alternative’ financial concepts are rapidly joining the mainstream. So, how do you get involved and what are the likely risks and rewards?
History of P2P
P2P lending, which is sometimes called “crowdlending” appeared in the UK back in 2005 with Zopa.com, which provided loans online and brought together investors and borrowers. Currently it has 60,000 active investors and about 277,000 borrowers. It was quickly joined by similar businesses, such as Funding Circle. These companies attracted investors because they offered high yields of 6 to 8 per cent on their investments. It sounds good, but even the P2P loan companies explain that there is always a risk.
Some companies mitigate risk by backing loans with tangible assets like property. This can reduce the risk of loss because the assets may be sufficient to cover defaults on loans. However, even if a lender does have tangible assets, investments can still be at risk, so it is important to consider all risks before being swayed by the high rate of return on your investment.
Getting started with P2P
There are some ways to dip your toe in P2P with minimal risk. For example, there is a Peer-to-Peer Self-Invested Personal Pension (SIPP that allows people to share in the funding of a portfolio of loans to credit-worthy businesses using their SIPP.
The other alternative is to choose one of the established P2P companies and start with a small investment of say £100 to see how it goes, although you can invest as little as £10 if you wish. Some companies even have a minimum investment amount of £10 and few have a maximum amount. The key things to check before investing are the default rate for each P2P company and the average return. For example, LendInvest claims to have a zero default rate and average returns of 7.18%. Funding Circle states its default rate is 1.5% and Zopa, 0.8%, according to a useful review of the main P2P lenders published in the Daily Telegraph in 2016.
The Financial Conduct Authority has kept a keen eye on the P2P sector and puts lenders through a rigorous process before granting them full approval. It’s this stringent regulation that has supported investor confidence in the UK. It is an ‘asset class’ of investment that is worth considering, but do your homework and only commit a proportion of your money that you’re comfortable with. For £10 or even £100, it seems worth giving it a go.