Peer-to-peer lending has been around for more than a decade now. Although it kicked off with a shaky reputation in the early days, it is now considered a perfectly viable alternative. In a nutshell, P2P lending is a type of lending that cuts out traditional banks and connects investors with individual borrowers or businesses.
One loan can be funded by several investors. Often, these investors are brought together by investment platforms like Fast Invest and have little to no obstacles to get started online. P2P lending is one of the more popular investment options among smart savers who want to create a passive income stream and make their savings work a little harder for them.
A new peer-to-peer lending trend, as reported by the BondMason’s Market Report 2017, benefits people actively working on their retirement investment plan.
“We predict that direct lending will soon become a pension-grade investment product, as more and more institutional investors take advantage of this growing industry. This makes direct lending a real game-changer for the future of pension provision, in an environment where everyone is searching for a way to make their money work harder for their retirement,” said Stephen Findlay, CEO of BondMason.
If you’re thinking about investing in consumer loans, you probably already know a thing or two about the returns they can deliver. In this article, we will go over the basics of P2P lending and how this type of investment can help you build up your pension income. Read on to ensure you have your facts right.
The Main Benefits Of Investing In P2P Loans
High returns. Direct lending is an attractive concept for both lenders and borrowers. At its heart, it is designed to offer fair interest rates to consumers and handsome returns to lenders. Everyone wins.
For lenders, investing in consumer loans is a highly profitable alternative compared to simply leaving their money to sit in a savings account. With the savings interest rates at historical lows, traditional banks are continuing to squeeze the struggling savers. Whereas investment in p2p loans can, on average, achieve returns in the range of 5% to 13% annually. And in some cases, lender’s investment can be protected through some form of security, such as property, or cash flows, if the borrower is a business.
The high returns for investors are possible because the technology allows P2P platforms to cut the expenses that big banks cannot avoid. At Fast Invest, we use smart fintech solutions to reduce the costs to the minimum and let our customers earn more than they could anywhere else. By keeping their operational costs very low, P2P providers are able to offer lenders ROI that’s close to the cost of borrowing for borrowers. Although the market is starting to mature now with returns falling slightly in the recent years, the potential is still impressive and worth exploring for keen investors.
Diversification. The ability to diversify your investment portfolio by spreading the money across many different loans enables you to manage your exposure to risk. For instance, if you’re prepared to invest £5000, you will feel the difference between spreading the money across 10 loans and 100 loans in a case of defaulting. With the money divided across 10 loans only, you will run a risk of losing £500, a considerably larger amount than a loss of a mere £50 in the other scenario.
Control. As an investor, you have the right to choose who you want to lend to. You can define your investment rules on the selected P2P platform and only invest in loans that meet your criteria. For example, you can choose to fund people with a high credit worthiness only, or those from a certain country, or borrowers who offer an asset, such as property, as security. You can either do it manually or define the rules and enable the auto investment tool to distribute the money for you.
Access to your money at short notice. Sometimes things don’t go to plan, and you might find yourself in an urgent need of money. The great thing about investing in consumer loans is that you can get your money back at a very short notice. At Fast Invest, we offer the BuyBack Guarantee, which is our promise to buy back your investment in one day. Other platforms might require you to put your loan up for sale and allow you to liquidate your funds only if someone buys it. We think having a stress-free experience is vital, so we’re happy to return your money in 24 hours or less.
Personal Savings Allowance. For UK investors, returns on p2p loans are currently exempt from tax. Any interest you earn will be included in your “Personal Savings Allowance”, which stands at £1,000 interest for individuals paying basic-rate tax and £500 for higher rate payers. However, you will need to start paying tax on anything above that.
What about risks?
While direct lending has worked well for many investors, it must be said that returns are not guaranteed, and your capital is at risk.
Naturally, the primary risk is not being repaid if a borrower defaults. But leading providers are working hard to mitigate this risk by using different safety measures. Ensure you consider the safety factor when choosing your P2P platform to retain the peace of mind and put your money in good hands.
Here are a few aspects to take into account.
Your money may not be lent immediately. You will start earning interest only after your money is lent out. While smaller amounts get lent out almost immediately, investors looking to put in bigs sums (we’re talking £30,000 and more) may need to wait a few weeks. Instead of using the whole pot of money at once, try to drip-feed it to avoid any delays.
No savings safety guarantee. In the UK, standard savings are protected by the Financial Services Compensation Scheme, which promises to pay the first £85,000 per person, per financial institution if the institution goes under. There’s also an EU Deposit Guarantee Scheme that protects savings by guaranteeing deposits of up to €100,000. Unfortunately, peer-to-peer lenders don’t have the same protection.
How do rates stack up?
Returns on peer-to-peer loans can range from 3% to 13%, depending on the investment’s risk, the length of the loan and other factors. Most of the investment opportunities at Fast Invest offer 10% or higher returns. Although rates do fluctuate, lenders who take their chances typically average much higher returns than those offered by savings accounts.
According to MoneyFacts, the average return on a five-year fixed bond was 1.93% in September 2017, while the average five-year fixed ISA offered 1.68%. By comparison, a fixed-term investment into consumer loans typically yields 5%, while Fast Invest loans can generate up to 13%.
If you follow the financial news at all, you may have heard about a new breed of direct lending - peer-to-peer loans using digital currency like bitcoin or ether. Cryptocurrency market is experiencing a boom. New crypto hedge funds are popping up one after the other, as institutional investors begin to grapple with the magnitude of the opportunity.
For investors, crypto lending represents a unique investment avenue with potentially sky-high returns. Besides investing in cryptocurrencies, they are trying their hand on ICOs (‘Initial Coin Offerings’), which are essentially crowdsourcing campaigns where a company issues its own cryptocurrency to raise funds. Returns on ICOs can go as high as 1,320%.
The blockchain technology will enable P2P providers to offer more security, transparency, and lower rates. And while we wouldn’t advice inexperienced investors to make large crypto investments, we would certainly encourage them to keep their finger on the pulse and follow new developments in this market, as it is, indeed, the future of the financial sector.
When saving for retirement, it is vital to have a long-term vision. You’re right in thinking that socking away cash or building a savings account is a more secure way of planning for retirement, but it doesn’t offer any growth. 96% of UK pension funds give better returns than cash over a 10-year period, with the average return reaching 6.21% per year.
The key to a profitable pension investment plan is balance. Once you start actively building your pension income, ensure your portfolio is diversified to minimize risks and set yourself up for a comfortable future. Don’t put all your funds into one sector, such as property loans, for example, and try to invest your cash into multiple peer-to-peer platforms or providers to keep the balance in check. While investing is essential, don’t forget to put some cash aside for a rainy day - just to be on the safe side.
As a stream of passive income, returns on P2P loans will build up over time. You can choose to reinvest your earnings or withdraw the money into your bank account every month. Financial experts agree that pensioners should throw the net wider and look at a combination of holdings - some low-risk investments or fixed-bonds and higher-risk products that offer better returns. Those who decide to invest should most certainly throw P2P loans into the mix - the option to withdraw money when required as well as the balanced risk-return profile makes direct lending a more than suitable choice.