5 reasons to invest in Peer-to-Peer Lending
The very aim of Peer-to-Peer (P2P) lending is to provide a platform where borrowers and lenders (investors) can be matched directly. P2P lending is a type of loan which requires individuals to invest capital in order to create loans for the borrowers.
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Aside from the obvious bank beating interest rates on offer and communal benefits, the following are our top 5 reasons for investing in P2P lending:
1. Spanning the Globe
First introduced in the UK, P2P has expanded its reach all over the world in a very short span of time. Zopa created the first peer-to-peer lending platform in 2005, in the UK. Thereafter, the “banking without a bank” concept of P2P became famous all around the world, including countries like India, China and the U.S. For example, Prosper and Lending Club in the U.S have increased their combined loan volumes roughly 40 times 2009–2014 from $60.7m to $2.36bn in 2014 alone. And it is largely because of this reason that Neil Bindoff of PwC vouches for the growth of P2P by calling it a ‘perfect storm.’
On account of its impressive footprint in robust economies like the UK and USA, many financially developing nations like Indonesia and India have experienced a huge growth in P2P loans, and many investors have benefited from higher returns than would have been received by putting their money in a bank.
The growing reach of P2P is further highlighted when the president of Prosper Marketplace, Ron Suber said:
Demand from borrowers and investors, retail and institutional, remains at an all-time high
More on peer-to-peer lending growth here.
2. P2P becoming fast, liberal and efficient financial giant
Peer-to-peer lending is a financing ecosystem which provides enormous liberty for people intending to get loans. Unlike conventional banks and other financial institutions, P2P doesn’t make it a mandatory requirement for borrowers to show some strong reasons for borrowing money. Simply an ability to repay the debt, which is assessed with as strict a criteria as other lending mediums.
Because of its nature, P2P is not complicated. Its success counts largely on the quality of the algorithms used to scrutinize borrowers and the user-friendliness of the P2P platforms: they have their own applications, making it easier for smartphone and tablet users to access the platform.
In addition to being considered a fast and efficient mode of financing compared to conventional financing methods, P2P lending significantly reduces the financing cost and saves a considerable amount of time for the borrower.
So if you are looking for a quick and efficient method for borrowing, whether consolidating debts, expanding a business or buying a car peer-to-peer lending could be for you.
3. Risks mitigation for investors
What are the peer-to-peer lending risks? The primary risk is a borrower defaults on their loan and you lose your money. There is always a risk you lose your money, in all types of investing. P2P security measures are put in place to mitigate these risks.
If you are a don’t-put-all-your-eggs-in-one-basket kind of investor, as you should be, then P2P firmly endorses this ethos. You can invest small amounts across a number of loans through an auto-diversify function, automatically spreading your risk in accordance with the product and your risk profile. You may also manually select your loans with some P2P platforms.
Here are a few important features implemented by peer-to-peer platforms in order to mitigate P2P risks:
- Asset security
- Diversification
- Provision Fund
- Strict lending criteria
Compare P2P platforms and the security measures they implement here.
4. P2P Regulation brings good news
In recent years, peer-to-peer lending has been subject to regulation so that lending and borrowing can be better protected. For this reason, in 2014, the Financial Conduct Authority declared peer-to-peer lending was to become regulated. Regulation brought with it a number of substantial benefits, among which the transparency of information provided by the peer-to-peer platforms was focal. In addition, regulation emphasized how platforms implemented security procedures to mitigate the risk of borrower default and, ultimately, investors losing their capital and interest.
Even more pressure has been put on P2P platforms to impose effective security measures. From April 2017, platforms will be required to keep at least £50,000 of capital in reserves — often referred to as a Provision Fund — in case of borrower default. No peer-to-peer lending platform is exempt from these rules and therefore, all firms are subject to major sanctions, which can include large fines in-case of non-compliance with the regulations.
5. New UK ISA benefits all
With the growth of peer-to-peer lending, and the introduction of regulation by the FCA, it has made it impossible for the UK Government to ignore this asset class.
In April 2016 ISA regulations will change, a new ISA related to peer-to-peer lending will be introduced. This will allow the everyday person, possibly you, to invest your yearly allowance — £15,240 — across a Cash, Stocks & Shares and (new) Innovative Finance ISA (IFISA) respectively.
The IFISA will allow you to hold your peer-to-peer investments in a tax-efficient ISA wrapper. This will mean any interest earned on your P2P investments within your IFISA will not be taxed.
Find out more about the Innovative Finance ISA by clicking here.
These are just a few reasons to encourage you into investing in this innovative and profitable asset class.
