The pro’s and con’s to Peer to Peer lending

Peer to Peer Lending (also referred to as P2P or P2B – Peer-to-business) is the practice of borrowers taking out loans from individual investors who are willing to lend their own money for an agreed interest rate. It has become so popular in recent years (thanks mostly to poor returns and strict lending criteria from high street lenders), that today it can almost be considered a mainstream method for investors to earn better – rates of return.

An example would be Joan with £1000 to invest.

Understandably, Joan is keen to get more than the two per cent interest she is being offered by her high street bank for putting the money into a savings account. Instead, she invests the money into a Peer 2 Peer Lending Platform, which offers her an agreement of eight per cent return a year. That’s a huge six per cent increase on the savings account figure, meaning she will receive £80 on her loan investment, compared to the £20 with the savings account. Although Joan must remember that P2P lending carries additional risk, in comparison to a savings account.

There are many different types of Peer 2 Peer platforms in the UK. These can cater for different types of borrowers and offer different levels of security and returns for investors. Some borrowers will lend money to complete building projects, for instance, or to buy a new car. Security on the loan varies, and comes in the form of other assets, such as where the property is used as collateral.

More often than not, the riskier the loan, the higher the rate of return. For instance, Greg is a builder and is looking to borrow £100,000 to complete a house on a piece of land that he owns. He intends to sell the house for £150,000 once complete.

But Greg has struggled to raise the money he needs for the house from his high street bank. So, instead, he has turned to a Peer 2 Peer Platform to borrow it. This is agreed with the proviso that he is willing to pay investors a 10 per cent interest rate for a 12-month loan. The conditions also assert that he gives the investors a first legal charge over the land as security. This means the investors would jointly become the landowners, should Greg default on the loan and fail to make repayments.

Peer 2 Peer Lending is regulated in the UK by the Financial Conduct Authority (FCA), whose job it is to ensure every platform operates according to strike regulations, particularly in regard to the protection and treatment of client money and to ensure each loan opportunity is legal and transparent.

Pros of Peer 2 Peer Lending
● Peer 2 Peer lending can start from as little as £10
● There are a variety of loan terms and returns for investors with different risk appetites
● Peer 2 Peer platform providers often have strict lending criteria and undertake thorough due diligence on all investment opportunities and on borrowers – which can give comfort to investors using their own money
● Investors often (but not always) receive regular interest payments, either monthly or quarterly and in proportion to the amount they have lent

Cons of Peer 2 Peer Lending
As with every type of investment, Peer 2 Peer Lending carries risks. There is no guarantee that an investor will be repaid the money that he or she has lent to a borrower via the platform – to the extent they may lose the entire sum of their investment. That’s because borrowers might be unable to pay back the loan, and the funds an investor lends through a Peer 2 Peer platform are not covered by the government-backed Financial Services Compensation Scheme (FSCS).

Tips for investing in Peer 2 Peer Lending
Before committing to loaning money on a Peer 2 Peer platform, every investor should do their own thorough due diligence. Investors should try, where possible, to reduce their exposure to one type of lending opportunity or borrower. In fact, this diversification tactic is a popular practice among seasoned investors.

Invest in property without buying a house

Want to invest in property – but without the hassle of physical bricks and mortar asset to look after? Then investment ‘vehicles’ such as Peer to Peer lending and Crowdfunding is exactly what you’re looking for.

The two sound similar in that both offer ways of investing in property in a hands-free manner i.e. you provide the funding and someone else does the buying, makes sure the project runs smoothly, carries out the admin etc. All you have to do is sit back and wait for the returns. Sound simple? That’s because it is.

Both Peer to Peer Lending and Crowdfunding have become increasingly popular in recent times. That’s mainly because, firstly, people were looking for better returns than high street banks and building societies could offer post-recession. And, secondly, the new platforms have made it easier for developers and others, such as small businesses, to get a loan in the first place (banks and building societies having severely tightened up their lending criteria).

In fact, so mainstream have Peer to Peer Lending and Crowdfunding become that so far this year around £2.27 billion of finance has already originated through these platforms. The data, supplied by independent research company AltFi Data looks at lending by tech companies such as Zopa, RateSetter, Assets Capital etc.

Peer to Peer Lending explained

This is when you lend money to borrowers (either one borrower or a handful, depending on how the website works). Typically, the loan will be for anything from one to five years and you’ll get interest either at the end of each year or some other agreed time e.g. once the development is complete, together with your original loan).

The higher the level of interest, then obviously the riskier the borrower. However, all Peer to Peer lending sites in the UK are regulated by the Financial Conduct Authority (FCA). This means platforms must adhere to regulatory standards and protect investors’ cash is ring-fenced and can’t be touched by the platform in a segregated client account.

Crowdfunding explained

With property crowdfunding you can become a landlord by using your investment for a part- share in a buy to let, or even funding it outright. It is common for crowdfunding platforms to pay out a monthly income based on your investment in addition to the capital appreciation of the property. The main difference to P2P Lending, being that crowdfunding is equity-based rather than debt based. Crowdfunding sites too are regulated by the FCA and again, like Peer to Peer investing, there can be losses as well as gains.

Sourced Peer to Peer Lending model

At Sourced, we offer the ability to invest securely in properties – both residential and commercial – with a return of up to 12%. Like most online lending platforms, we’re able to offer better returns than alternative investments because we’re cutting out the middle-man (the broker).

At the same time, property developers are benefiting by being able to access loans quicker. Borrowers are charged an arrangement fee, while investors pay a monthly servicing cost.

Investors receive capital repayments at the end of the loan term along with interest rates repayments. If a borrower defaults on a loan, Sourced will act on behalf of the investor in an attempt to recover their funds.

As with any kind of lending, an investor’s capital and unpaid interest is at risk of default, and investors should ensure they have satisfied themselves of the risks and should never lend more than they can afford to lose.

Find out more about our Peer to Peer Lending scheme at our website: www.sourcedcapital.co or give one of the team a call on: 0333 9009 999 today.

P2P vs. Crowdfunding

More and more would-be buy to let landlords are turning to ‘easier’ ways to make money from property these days. And who can blame them? Landlords have been hit in recent years by government tax incentives, such as abolishing landlord mortgage interest relief and adding Stamp Duty to second homes.

But there are other ways to invest in property without actually having to do much – hands-off property investing from a distance. These include P2P and Crowdfunding. Although neither qualify for the Financial Services Authority (FSA) Compensation Scheme, they are FSA-regulated. And, the loans are secured against property. Below, we have listed the benefits of both P2P and Crowdfunding:

Benefits of P2P

P2P is where you provide cash to borrowers, which is secured against property. This is usually for large-scale new developments and covers both the residential and commercial property sector (crowdfunding tends to be heavily on the residential side).

● You can invest ‘little and often’ with P2P. In other words, it’s possible to ‘spread the loan’ across various borrowers and their development schemes. This is obviously safer, should one borrower end up in difficulty. Anyway, it’s never a good idea to put all your eggs in one basket, regardless of what industry you happen to be in.
● The returns are fixed, so you’ll know how much you should receive every quarter or year (whatever the agreed returns timetable).

Benefits of Crowdfunding

When investing in a crowdfunding platform, it’s closer to the act of being a buy to let landlord. That’s because you can receive a share of the rental income from the property you’ve put money into, which is based on your investment. You’ll also benefit from capital gains if the value of the property accrues (which it should).

● Like P2P, you don’t have to invest a lot of money, and it’s possible to split your investments across several properties.
● These returns aren’t fixed like the Peer 2 Peer loan model, so may differ, depending on how well the property performed in the marketplace.

Why you should have both P2P and Crowdfunding in your property portfolio 

It makes sense to diversify your income and investments stream. That’s because if one online investing platform were to go under, you wouldn’t lose as much as if you had invested everything there. You have a safety net, in other words.

Also, although many platforms do have contingency funds, that’s not to say there is enough in the pot for every single investor. So, although that is a safety net of sorts, it may not be quite as secure as you hoped.