Disclaimer: The following article is not financial advice. There are no affiliate links included in this article.
Today I received a letter from my bank informing me that the interest rate on one of my savings accounts is reducing from 0.35% to 0.2%. In today’s climate it is becoming difficult to find a decent interest rate for my cash. With the current rate of inflation in the UK at 1.8%, the interest my cash is earning means that I am effectively losing money. So, what do I do? As, always I have been on the search for opportunities to make my money work harder for me. Check out my previous post to see about my experiences investing with a cryptocurrency trader. Although the potential gains from a riskier investment like cryptocurrency trading can be great, the level of risk can be so great that as with most investments I wouldn’t recommend risking any more than you can ‘afford’ to lose.
In my search for a more stable, regulated investment, I stumbled across Peer-2-Peer (P2P) lending. The big companies in the UK are regulated by the Financial Conduct Authority (FCA), however it’s not quite the same as saving as they are not regulated by the Financial Services Compensation Scheme (FSCS). In the UK, normal savings are protected by the FSCS who guarantee to pay the first £85,000 of any money saved per person, per financial institution if that institution went out of business. This is not the case for P2P lending. I would view P2P lending as an investment rather than savings.
What is Peer-2-Peer lending?
Peer-2-Peer lending is when companies (via a website) match investors with borrowers. They provide a platform for everyday people to loan money to either other individuals taking out loans or businesses. These companies do the hard work in finding and vetting borrowers and also manage debt collection. They have processes in place for managing ‘bad debts’ and should have a provision fund in place to help mitigate the risks involved in lending. When I first came across this it sounded interesting as this is how banks have been making money for centuries. Banks essentially take money that people have invested in savings, and lend it to borrowers charging interest. A very small proportion of that interest is passed on to savers. My issue with the banks is that it’s only a very small portion passed on, 0.2% in my case. Most of the P2P platforms will diversify the money you invest so that it is split into chunks and loaned to a large number of borrowers, lowering the risk for investors. This way, if a small number of debts aren’t repayed it would only affect a very small proportion of money loaned out.
Which companies offer Peer-2-Peer lending?
There are 3 main compaines I have come across.
ZOPA was one of the first P2P platforms set up in the UK. They claim to reject 80% of borrowers that apply for a loan with them. The 20% of borrowers they do accept are given a rating from A* – E with E being the riskiest borrowers. They currently offer 2 borrowing products Zopa Core and Zopa plus. With Zopa Core, projected returns are between 3.4 – 5.0%. This package excludes loaning money to the highest risk borrowers. With the ZOPA plus package projected returns range from 4.0 – 6.0%, but includes lending to up to 20% of your investment capital to their riskiest borrowers.
Ratesetter is another big player in the P2P industry. They claim to have had over 84,000 investors who have loaned out over £3.6 billion. They offer 3 products:
- The Access Product – offering 3% returns with no fee to withdraw cash.
- The Plus Product – offering 3.5% but a 30 days’ interest release fee
- The Max Product – offering 4% returns but with a 90 days’ interest release fee
Funding Circle is the 3rd P2P platform I came across. Unlike Ratesetter and ZOPA, Funding Circle focuses on lending to businesses. They offer a projected annualised return of 4.5 – 6.0%. In comparison to some other lending platforms they offer higher returns, but these higher returns come with a higher risk of ‘bad debt’. It has also been reported that if you want to withdraw your money early it could take up to several months to ‘sell your loan book’ on to new investors to release the cash.
Early withdrawal is definitely something worth looking into if you consider P2P lending. Each platform I have come across has slightly different rules and advice to the process of early withdrawal. Some platforms claim that money can be with withdrawn early from within 1-3 days of making a withdrawal request, however others claim that it can be a lengthier process, particularly if the current interest rates available are significantly different to when you first invested. For example, if the interets rates on offer were 3% when you signed up and you are trying to sell your loans early to withdraw your cash, but the interest rates on offer when you want to sell are 8%, you may find it difficult to withdraw your cash early.
Overall, P2P lending looks like an attractive option to me. My golden rule of ensuring I have minimum 3 months pay in cash savings available for emergencies still apllies to my decision on if, when and how much money I’ll invest in this. I’m certainly considering investing a small amount. With the minimum investment amount for some of the platforms being £1000, I need to decide how much I can afford to put into this in the medium term without needing to potentially withdraw early.
If any of you have experioence with P2P lending, let me know your experiences.