Peer to peer lending advantages and disadvantages

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One of the fast growing and popular investment channels in the UK is peer to peer (p2p) lending. Every year thousands of individuals lend money using peer to peer platforms in return for tax-free interest. Like any other investment channel peer to peer platform have its advantages and disadvantages. Whether you are looking to increase your existing investment or making your first investment, make sure you are aware of p2p platform pros and cros. 

For your better understanding and guidance, we are going to enlist p2p lending platform benefits and drawbacks. 

Peer to Peer lending benefits 

  • Interest Rates

One of the most significant benefits for peer to peer lenders is the interest rate. For instance, with Kuflink platform, investors can make up to 7.2% interest yearly. Because of the low-interest rate of traditional savings accounts, many are looking for alternatives to invest and make most of their funds, including peer to peer investing. 

  • Ease of Use

Peer to peer platforms are very easy to use compared to other investment channels like stocks and shares ISA. P2p investment is entirely online with minimum jargon. For p2p lending, you don’t need to have a background in finance to get started. Also, p2p lending tends to offer low minimum investment amounts, which provides an opportunity to get more out of the investments if you are new to investing.

  • Variety

Another great benefit of p2p lending is that borrowers can use these loans for different purposes. This means as investor you have a lot of choices for lending their capital. These loans are commonly used for funding small businesses, housing developments or helping borrowers expand their property portfolio. 

  • Diversification

Majority of p2p lending platforms offer a product that can diversify your investment automatically across different opportunities. This diversification is beneficial because it spreads your risk since you are not putting all your funds into a single loan. 

  • Innovative Finance ISA (IFISA)

Innovative Finance ISA (IFISA) was launched in 2016. Most p2p platforms offer IFISA. This type of ISA allows people to use annual tax-free allowance for investing in peer to peer loans and earning tax-free interest. 

  • Secondary Market

While investing, you shouldn’t assume that you can exit your investment early. However, a secondary market provides a chance for investors to sell parts of their loan to other investors on the p2p platform. A secondary market provides liquidity to investors if they need to access money in advance than planned. 

  • New FCA Regulation

Even though peer to peer platform has been a regulated activity in the UK, the FCA recently reviewed the peer to peer sector and has issued regulatory guidelines for institutes. The rules are made for better protection for investors. Remember, it is essential to undertake due diligence and not invest only on the basis that the company is FCA regulated. 

Peer to Peer Lending Drawbacks 

  • Capital Risk

P2p investments aren’t covered by the FSCS (Financial Services Compensation Scheme). This means that you can lose the total investment that you put in. While most platforms ensure that this doesn’t happen but there is no guarantee, since repayment of your money generally depends on the borrower’s repayment. You have to make sure that you understand the risks before lending your money.

  • Tax Responsibilities

The interest you will earn from peer to peer investments is subject to HMRC tax requirements, and you need to meet those requirements. The good thing about p2p investment is that you can put your earnings toward your annual Personal Savings Allowance, which is £500 for high rate taxpayers and £1000 for basic rate taxpayers. This way you don’t need to pay tax on the interest up to this amount. 

  • Platform Variation

Peer to peer lending covers a wide variety of different platforms, security and loans types. It would be best if you considered each opportunity in detail before making an investment. It is always important to check who runs the platform, their background and their loans history; however, past performance is not always a reliable indicator of future performance. 

Weighing the Pros vs. Cons

Just like any other financial decision, the answer based on your personal circumstances, choice and your risk appetite. There are numerous benefits of p2p lending and it is a great way to diversify your portfolio or to invest without committing a huge amount of capital.

            Furthermore, it is important to look beyond the interest rates and to understand the overall risks, because repayment of your capital can be late and you may end up losing all or part of your investment.