Investing in consumer credit has, until very recently, been solely the remit of large financial institutions. The only way that independent investors could get involved at all was to buy shares in those institutions, thus gaining a stake in all areas of the business. Since the global financial crisis, and all the restructuring that took place at that time however, peer to peer (P2P) consumer lending has been on the rise. Whether Millennials looking for new ways to increase their income, or retirees trying to boost their pension fund, consumer loans have presented a low-risk, short-term way to make their money work.
No longer considered a temporary blip while the economy righted itself, consumer lending is steadily becoming an accepted part of the financial ecosystem, to the point that by January 2017 the format was estimated to be worth £7 billion in the UK alone. By 2020, it is believed that the global P2P market will generate in excess of US$1 trillion. Why? Because borrowers enjoy the convenience, while lenders enjoy the healthy return on their investment.
Investing in consumer lending is far from a temporary bubble, so as someone who wants to make their money work for them, what do you need to know about investing in consumer loans?
What Is P2P Lending?
Initially triggered by the reluctance of banks to make unsecured loans, then further adopted by the ‘on-demand’ generation, P2P lending is the process by which borrowers have their lending needs fulfilled by private individuals, avoiding the officialdom and administration involved with conventional bank loans. Side-stepping the need for securities, P2P borrowers are gauged on their ability to repay the loans using their credit history, and reputable investment platforms, such as FastInvest, will only become involved with those borrowers who have been signed off by Certificated Credit Institutions, meaning that the risk of losing an investment is low – and made even lower by FastInvest’s default payment guarantee.
The main reasons why P2P has so rapidly gained ground with investors are partly the low-risk factor, and partly the high return. With interest rates only just emerging from a 10 year low to sit at the far-from heady heights of 0.5%, savers have been experiencing a particularly raw deal when working with banks. Even the best cash ISAs are failing to deliver returns anywhere above 2.15%, so although cash is secure, with an inflation rate of 2.9%, savers are effectively losing money in real terms. In comparison, P2P investments avoid the risks associated with playing the markets, while delivering an ROI (return on investment) far in excess of standard banking rates; FastInvest, for example, typically deliver a 9-13% ROI.
In essence, investing in P2P lending allows for the creation of a passive income. Because most P2P contracts are short-term – one to twelve months – investors can see a rapid increase in their capital; invest £1,000 in January, and you could have as much as £130 extra to your name come December. Because of the nature of loan repayments, interest (and your original investment) is paid in monthly instalments, which means that as your cash flows in, you have the wherewithal to pursue other P2P investments. By consistently re-investing your returns (the FastInvest Auto Invest tool is a fuss-free way to handle this) you can quickly accrue significant gains, without having to take big risks, or work hard to follow any particular market. You don’t even need any specialist knowledge to start, other than where to find a reputable platform.
How Does the P2P Investment Transaction Work?
- Pre-checked personal loan requests are listed on the investment platform’s website – you can get a feel for this here, on the FastInvest homepage.
- From there, investors can view the loan terms: the length of the proposed loan, the amount the client wishes to borrow, the interest they will receive, the liabilities on that loan. The platform also provides the anonymised details of the borrower, so their age, sex, location, and income, so investors are able to make an informed decision before committing their cash.
- Loans are generally serviced by multiple parties, so if the required total figure is £4,000, it could be delivered by as many as 10 or 20 investors – the amount you contribute is down to you.
- Once you’ve decided to commit to lending, you will make your deposit via the lending platform.
- The borrower will then make regular monthly repayments to the lending platform, which will be split between lenders, according to the percentage they have invested – less the liabilities.
It can seem like a slow process if you're only working with a single investment, but few people do. The most efficient and risk-free way to gain a useful return is to spread your funds between numerous loans – it's far better to have £100 in 10 different pots, than £1,000 in one single jar.
Who Can Become a P2P Lender?
Short answer: Anyone. If you have a little bit of spare cash, then it’s far more sensible to put it to work than to keep it in a jar on the kitchen windowsill. Whether you’re a beginner looking at a few Euros a month, or a seasoned investor with a pre-saved chunk of cash to your name, P2P lending can make that money grow. FastInvest have a minimum investment rate of €1, so you don’t need to make a big commitment to get started. The best thing to do is take a look, make a small investment, then see how you feel about the process. It doesn’t take long to see the benefits.
What Are the Key Benefits of P2P Investment?
We’ve already covered a couple here: risks are relatively low, while returns are relatively high; for many, that's reason enough to give P2P investing a whirl, but there are other benefits too.
It’s quick and easy to invest; there are no markets to study and there’s no bureaucracy to dance around; you don’t even need a broker, so there are no hidden expenses.
It’s incredibly easy to diversify; within a single platform you can make as many investments as you like. If you want to spread €100 across 100 investments, then you’re perfectly free to do so. While that is slightly on the extreme side – and you’re a better person than us if you’re organised enough to keep track of that sort of portfolio! – it does illustrate the point. P2P is flexible and effortless to manage, particularly if you use an automatic investment tool.
P2P delivers a regular income. The beauty of the loan set-up is that your return is steady; you don’t need to wait for months, or years, to receive the benefits of your investment, which means that you can put your returns to work too.
Finally, P2P investing is transparent. You can see what you’re getting into right from the start: there are no hidden fees, so there are no nasty surprises.
What Are the Potential Risks of P2P Lending?
The main risk involved with P2P comes from borrowers defaulting on their loans. If a borrower misses a payment, your income stream is interrupted. If they fail to repay the loan, then you’ve lost your cash. Now, this is one of the reasons why it’s wise to spread your investment across numerous loans, but you can also protect yourself against this by working with a platform like FastInvest, which provides a default guarantee. In other words, if the borrower fails to make a payment, FastInvest will cover the deficit.
Something else worth considered is whether the platform offers a buyback service. No one is immune to a sudden change of fortune where every penny counts – whether it's the loss of a job, or an unexpected home emergency – so having the flexibility to reclaim your cash, quickly, is an essential. FastInvest offers a buyback guarantee, so if you do find yourself in the grip of one of these events, FastInvest will purchase the remainder of your investment from you, making sure that you can access the cash within 24 hours. It's a safety net that you hopefully won't need, but it’s still there should your tightrope inexplicably fray.
What is the Future of P2P Lending?
We don’t have access to a crystal ball, but the general consensus is that P2P’s future is bright. Since the global financial crisis, traditional lending markets have shrunk. 10 years on, it’s still difficult to obtain a small business loan, and if you’re a personal borrower without significant surety, banks just don’t want to know – hence the mighty advance (and then downfall) of payday lenders. In direct correlation with this shrinkage, is the growth of peer to peer.
Offering flexibility to both lender and borrower, a strong ROI, a manageable interest rate and a hassle-free delivery, the P2P proposition is a contemporary solution to an age-old supply and demand problem. Working to the mutual benefit of all parties involved, P2P could be viewed as the perfect example of a symbiotic relationship, and as long as that continues to be the case, there is no reason why consumer lending should falter.