Fed up with low savings rates? Peer-to-peer lending could be perfect investment strategy to help you beat the banks and make the most of your savings. In this article Richard Litchfield, from Lending Works, shares his expertise for creating a lucrative and low-risk P2P strategy.
In the current economic climate, those looking to make the most of their assets face something of a dilemma. With the Bank of England base rate currently stuck at 0.5%, and the predicted rises still failing to materialise, saving is currently not a very rewarding option: in fact, putting your assets into a saver will probably see them depreciate in value, as interest rates struggle to compete with rapidly rising inflation.
It’s not just savings that are currently suffering: other once-dependable ways of maximising your assets are no longer as rewarding, either. Even the help-to-buy market is no longer looking like the safe bet it once was, with punishing Stamp Duty Land Tax rates and stagnating rents all hitting property investors hard. And, while investing in stocks and shares can offer lucrative returns, it can also be a very risky move if you don’t have the relevant expertise.
If you’re looking for a way to invest your money that presents less of a risk than stocks and shares, and which offers more competitive returns than the savings rates offered by the big banks, peer-to-peer (P2P) lending could be the perfect solution.
To help you create a low-risk investment strategy with a strong chance of great returns, I’ve put together this guide. Here, I’ll take you through everything you need to know before you invest, including diversifying your money to lessen the risk, choosing the right term, and how you can maximise your potential returns. Read on to learn more.
How does P2P work?
Before we get started, it will help to get a clearer understanding of how P2P works. Peer-to-peer lending is a form of investment that connects lenders with borrowers via an online lending platform. This effectively cuts out the middleman, meaning that lenders can get a better return on their investment, and borrowers can access more competitive interest rates.
If the borrower can’t make the repayments, then there’s a risk that you won’t make your investment back, but many platforms will offer extra security measures to help cushion any losses and give their lenders some extra protection. They’ll also ensure that all borrowers undergo credit and income checks. As with any loan, there’s always an element of credit risk, but long as you choose a reputable P2P platform, then you’ll find that it presents a much lower risk than investing in stocks and shares.
You’ll also stand to make much higher profits than you would with a traditional savings account, with many investors seeing returns of around 6% per annum on a five-year P2P investment scheme.
Always diversify your investments
As any smart investor already knows, no competitive investment is risk-free, so you shouldn’t put all your eggs into one basket. By diversifying your investment across different borrowers, you can help to build in a safeguard to help protect your money. This will minimise the impact on your assets if one of your borrowers should default on their payments.
Choose a repayment term to suit your goals
When you invest in a P2P scheme, you can usually choose how long you want to lend for. The length of your repayment term can have a big impact on your investment, so be sure to suit a term that suits your goals.
Shorter terms will usually mean lower rates (around 4.5% per annum), but they also allow for more flexibility. Longer terms can see you earn closer to 6% per annum, so this is a good choice if you want to prioritise getting the best return. Or, if you want the best of both options, you could even choose to split your investment across two different rates.
Know when to draw your earnings, and when to reinvest
Once you start to see returns, you’ll have the option to either draw from your earnings or reinvest them into new loans. Reinvesting essentially allows you to earn interest on your interest, so it can be a very easy way to make the most of your cash. Given that savings rates are currently so low, reinvesting can be a better way to maximise your profits than simply letting them sit in a bank or savings account, where they won’t accrue enough interest to beat inflation. So, unless you have plans to spend your earnings right away, it’s certainly a smart move to consider reinvesting.
If you’re currently looking for your next investment strategy, then you should definitely consider peer-to-peer lending. It’s a lower risk option than investing in stocks or shares, and it offers far more competitive rates than you’ll find at the major banks. So, if this sounds like the right option for you, take my tips on board: it could be a lucrative and low-hassle addition to your investment portfolio.