We’ve teamed up with Orca Money, specialists in Peer-to-Peer Lending, to show you how you could earn 10%+interest rates on your money.
This article will reveal the basics of peer-to-peer lending (P2P), so you can begin to earn better rates; rates that are almost guaranteed to beat those on offer from your bank.
Peer-to-Peer Lending: what is it?
Peer-to-Peer Lending is simply people lending money to businesses or other people through an online platform that matches lenders with borrowers. It’s simple to do and results in you earning better, fairer interest rates in the region of 5% per annum. Perfect if you are fed up with your bank.
Through peer-to-peer platforms such as Zopa and RateSetter you can lend your money to people who might want to buy a new car or finance a wedding. Funding Circle can match your money to British businesses wanting to grow, while Wellesley & Co help people develop property.
If you would like to learn more about peer-to-peer lending download a guide courtesy of Orca Money.
What are the benefits of peer-to-peer lending?
The main benefit is simple; you can receive significantly higher interest rates than you would with your bank. Different platforms offer different rates depending on the risk, ranging from 3.5% to 15%+ product dependent.
Another major plus point for peer-to-peer lending is that the process of lending is really easy and can all be done online. You can start lending from as little as £10, allowing you to test the water before lending more money.
From April you will also be able to hold your peer-to-peer lending products within a tax efficient ISA, known as the Innovative Finance ISA (IFISA). This adds an extra level of comfort, with increased government support, and ensures you receive tax-free interest upto the yearly allowance of £15,240.
What are the risks?
The no.1 risk associated with peer-to-peer lending is that the person borrowing your money doesn’t pay you back. The Financial Services Compensation Scheme does not cover P2P lending either so there is no compensation if your money is lost. Here are the key safety procedures imposed by P2P platforms to mitigate this risk:
The number one rule when lending your money through P2P platforms or when investing is to diversify. With peer-to-peer loans your investment is often automatically spread across a number of borrowers, ensuring all your eggs are not in one basket. This spreads the risk and mitigates a single borrower default affecting your money. RateSetter and Zopa retain very low default rates due to spreading a single loan amongst hundreds of borrowers.
Many UK peer-to-peer lenders, such as Wellesley & Co, securitize their loans with tangible assets that can be sold to repay investors should a loan default.
Many peer-to-peer platforms have a pot of money set aside which will repay the debt of a borrower in the even of default. There are no guarantees however, so, for further details click here.
Strict lending criteria
All UK peer-to-peer platforms will boast rigid and robust lending criteria. Christina Farnish, Chairperson of the P2PFA, announced industry default rates are between 2-3% presently. This is in addition to the industry falling under FCA Regulation, which enforces strict rules when lending and can sanction and fine platforms if they breach regulation.
How do I get started?
There are now a lot of peer-to-peer lending platforms to choose from so we advise checking out Orca Money as a first port of call. Orca Money aggregates and compares P2P lending platforms helping and empowering you to reach a decision faster. You can learn about different products and make a decision that is relevant to your circumstances. As always, make sure you understand the risks before making a decision and happy lending!