What does ‘liquidity’ mean?
If you have experience in traditional investments, you’ll be familiar with the term liquidity. If you have not, here is a quick definition:
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.
Example of liquidity
To break this down into simpler terms, imagine this: you want to buy a fridge that costs £500, cash is the simplest asset to purchase this product. If you don’t have cash, but an asset valued at £500 such as a piece of art then you are highly unlikely to trade the art for the fridge.
What you’d have to do is sell the art, turn that asset into cash, and then purchase the fridge. This issue here lies in the speed in which you sell the art and get the cash to buy the fridge. If you can afford to wait to buy the fridge, then fine, but if you want to purchase quickly, in a few days let’s say, then you have a problem.
You could be waiting an uncertain amount of time to sell. Fine art, in this instance, is considered an illiquid asset. Peer-to-peer (P2P) lending can be considered as similar, to a degree. (Investopedia definition)
What is ‘Early Access’ and how is my investment affected by it?
Early Access refers to the withdrawal of your lent funds. With many peer-to-peer lenders you have the option of investing in P2P products where you can withdraw interest as an income. You can invest in flexible short-term loans, where you will receive your funds quicker than if you invest in longer term loans accruing interest and not withdrawing.
If, in any instance, you want to gain early access — also known as ‘selling out’ — to all your funds you will have to enquire with your given P2P provider, but what will typically occur is your investment will be sold to a new investor looking to lend funds. This is where liquidity comes into play, because there must be a new lender (investor) willing to buy your loan in order for your “asset” to be transformed into cash so that you can withdraw.
How do I ‘sell-out’ of my loan?
Review our comparison table to see who and what products offer Early Access, but here’s RateSetter, for example, on their ‘sell-out’ procedure:
Average Sell Out statistics:
- 10 minutes to match replacement investor
- 0.72% Sell Out fee
- Same-day funds in bank account
This is just one example, from one peer-to-peer lender. Other P2P platforms will differ in the mechanics of their sell-out.
Things to be aware of include:
- Liquidity of the platform — the likelihood of a new investor purchasing your loan
- Fee for selling out — is there a fee, usually a percentage of your investment, to be paid?
- Speed of withdrawal — after your loan is sold how quickly will the funds be returned to you?
Is this a risk in P2P lending?
The risk lies in the speed in which you can gain access to your funds. RateSetter allow you to withdraw interest as an income, for example, but if you want to ‘sell-out’ you will have to wait for a new lender to buy your loan. This should take little to no time for the likes of RateSetter who have a lot of liquidity on their platform, but may be problematic for smaller peer-to-peer lenders who do not have as many new investors regularly coming to the table.
So the real risk is that no new investor buys your loan and your funds remain locked into your loan term.
Innovative Finance ISA (IFISA) and Early Access
If you’re seeking to take advantage of the tax-efficient IFISA in April, then there a few things you should know about it which you can find out about here.
One key factor is the ability to withdraw, or gain access, to your P2P investment held in your IFISA. ISA rules have been adapted to fit the illiquid nature of peer-to-peer lending.
Typically, in a Stocks & Shares ISA for example, you can transform your asset into cash quickly and withdraw, due to the liquid secondary market of stocks and shares. With the Innovative Finance ISA you must appeal to your ISA Plan Manager, who will be the P2P platform you invest in, to have your asset (P2P investment) sold before you can transfer it into cash and withdraw.
