How to Invest in Peer to Peer lending?
Peer to peer lending is a relatively new way to invest your cash, and one which is growing in scope and popularity. Some of the best rates out there at the moment are from the peer to peer lending market, and many people are taking advantage of these improved returns.
While for many, Peer to Peer lending works well, returns and (your capital) aren’t guaranteed or protected by the Financial Services Compensation Scheme (FSCS).
What is Peer to Peer lending in the UK?
Peer to peer lending in the UK has been around for a number of years but has only recently entered the ‘mainstream’. In 2014, UK peer to peer lending was officially regulated by the Financial Conduct Authority (FCA), which is great news for those wishing to use the services they offer.
How does Peer to Peer lending work?
Peer to peer lending cuts out the ‘middle man’ and instead matches investors and borrowers up to ensure favourable rates for each. Investing in peer to peer means your actual money is lent out to those who want a peer to peer loan. They pay their loan back in instalments, and at the end of the term you’ll have accrued the interest they’ve paid on their loan.
Of course, your money is not lent out to just one person – instead, it’s divided up to reduce the risk of non-payment by one borrower. You may have the impression that peer to peer lending and bad credit go hand in hand, when in fact peer to peer lenders check borrowers’ credentials when they apply. You can invest from £10 up to an unlimited amount in peer to peer loans, so the returns can potentially be very good. Of course, you may not get back all of your money – you can read about this in more detail in the ‘What are the risks of Peer to Peer lending’ section below.
What are the risks of Peer to Peer lending?
While for many, Peer to Peer lending works well, returns and (your capital) aren’t guaranteed.
Peer to peer lenders are not bound under the Financial Services Compensation Scheme, which promises to pay the first £85,000 of savings (per person) if the bank/building society goes out of business and cannot give investors their money. Of course, peer to peer lenders do have some safeguards in place, and the fact they are regulated by the Financial Conduct Authority does help. If a borrower does not pay their loan properly, you may not get all of your money back.
To find out more information on P2P lending, please visit https://www.moneyhelper.org.uk/en/savings/investing/peer-to-peer-lending-what-you-need-to-know or https://www.gov.uk/guidance/peer-to-peer-lending