Traditional investments have been providing low-interest rates for several years, which are not enough to beat inflation. It is a reason that investors are looking for alternative investments that can provide them with steady returns without taking significant risks. Peer-to-peer lending is an excellent alternative investment and brilliantly flexible way to earn higher returns on your money than you get from traditional investments or bank saving accounts. It is the simplest form of lending or borrowing money without involving any bank or middleman. It has become rapidly popular due to the benefits and flexibility that it offers to investors and borrowers.
However, you still need someone in the middleman who can bring borrowers and lenders together. P2p lending platforms act as intermediaries and match lenders with potential borrowers. There are several platforms in the Uk offering different interest rates and types of loans. You can do research and shop around to find the right platform for yourself. Many investors think that lending directly to individuals can be risky. And what if borrowers can not repay the loan. You can spread your investment across multiple loans to multiple loans to reduce this risk.
Reasons To Invest In P2p Loans
The main thing that attracts investors towards p2p investment is its high score on three measures: liquidity, safety, and interest rate. Let’s take an example when you leave your money in the bank. It is liquid and safe, but the interest rate is low or non-existent. On the other hand, when you invest in property, it is also safe to some extent and can be beneficial if you buy well, but your money is illiquid. If you are in need of money, you have to sell your property, which can take a long time. However, p2p lending is relatively safe and liquid, and it also offers relatively high-interest rates.
If you take measures and create a diversified p2p portfolio, there will be negligible risks. In addition, you can sell your loans in the secondary market and withdraw your funds whenever you want. You can also get interested within a tax-free wrapper by investing in p2p loans through Innovative Finance ISA (IFISA). Many peer to peer platforms offer this opportunity to the investors so that they can make maximum profit. However, returns are not guaranteed, and you must keep in mind that you may have to take a bit more risk to earn more returns.
Does Peer To Peer Investment Need Much Work?
It seems attractive and fascinating to earn a higher interest rate than that you would earn from a bank. But you can not get expected results if you do not spend all your spare time assessing different lending opportunities, managing your portfolio, and reinvesting your money. In contrast to traditional investments, it is easy to invest in p2p loans because all the peer to peer lending platforms operates online. You can create an account, transfer funds, and start lending in a short time.
Now many platforms are offering auto-invest functions to help investors manage their portfolio within a short time. You just need to set lending criteria and deposit funds. The platform will automatically spread your capital across multiple borrowers according to set criteria. It means it depends on you how much work you want to do when investing money on p2p loans.
Types Of P2p Lending
There are three main types of peer to peer lending, which are as follows:
- Money to individuals
- To businesses (small businesses or start-ups)
- The property Lending against
Some platforms focus on only a single type of loan, while others deal in all three types of loans. We suggest you invest your money in different types of loans to create a diversified portfolio.
Now let’s take a closer look at each loan type:
Money to individuals
It is the most common type of p2p loan, and this is how peer to peer lending UK was started. In the beginning, all the platforms offer personal loans. Individuals can take out a loan for a number of purposes, such as to pay utility bills, car repair, medical expenses, or home renovation. These types of loans are unsecured, so there is a bit more risk. If a borrower defaults, you can lose all your investment because there is no collateral.
Businesses may need funds to overcome cash flow problems, purchase new equipment, or cover staff costs. These loans can be secured or unsecured. In secured business loans, you must have a valuable asset or property or asset to use as security against the loan. Some lenders grant loans against the personal guarantee from the business director.
Peer-to-peer property lending is a short-term solution for renovating property and development projects. It is not something for property investors who need long-term loans like mortgages. Although investors have a security against the loans, there can be risks like if the development project fails. But as an investor, you have the benefit of selling the property to get your money back in case of borrower default.
Is It Safe To Invest In P2p Lending
Like all other investments, there are risks in peer to peer investment. So, it is essential to understand these risks and take measures to mitigate them.
- The most significant risk in p2p investment is the risk of borrowers defaulting or a loan going bad. It is when a borrower is unable to repay a loan on time. The risk is high when you invest in unsecured loans because you do not have anything to seize to get some of your money back.
- The second risk that you must consider is the risk of the platform going out of business. Sometimes the number of defaults is increased, and the platform goes into a loss resulting in the closure of that platform. As a result, it will become difficult for investors to get their money back.
- Another negative thing about p2p investment is the lack of liquidity. However, some platforms have a secondary market where you can sell your loans to other investors and withdraw your funds.
Peer to peer lending can be an excellent investment option if you choose the right platform having a good track record and liquidity.