How Safe is It to Invest in Peer to Peer Lending?

How Safe is It to Invest in Peer to Peer Lending?

Peer to Peer lending or P2P lending has been progressing as an alternative investment industry for the past several years in the UK. It is created in a way that it removes the banks between the investors and the borrowers by providing a platform on which people can lend cash and borrow straight from each other. This borrowing is done either directly or partially. One of the leading UK’s Peer to Peer Lending UK companies started in 2005 and today it has more than seventy-six thousand investors. But is it safe to take part in P2P lending? How much can you earn from it? Read further to find out more.

What is P2P Lending?

Peer to Peer lending permits consumers to lend cash to the people who like to borrow it, without reaching out to the bank. That straightforward way of lending money facilitates investors to earn higher profits, and borrowers to repay the loan at a reduced interest rate. That is possible because the P2P platform has lesser service charges as compared to the conventional banks.

P2P lending does not remove the broker entirely. The platforms have plenty of responsibilities, like screening borrowers, collecting late payments for the lenders and overseeing the transactions. To conduct all these procedures smoothly they charge a specific amount of fee for that. So, it assists both the investors and borrowers in benefiting financially from the Peer to Peer lending platforms.

How Does Peer to Peer Lending Work?

There are many Peer to Peer lending platforms you can invest in. As an investor, when you select a platform you can make a payment utilising your debit card or perform a direct transaction. You can assign or approve a constant interest rate and select the time length for which you would like to lend your cash which can range from one to five years. By the end of the loan repayment time, when your loan has been entirely repaid with interest, you can take out your cash or lend your returns again to improve your income.

What to choose?

Some websites allow you to choose exactly to whom you will like to provide a loan. But most of the time websites tend to divide your cash between plenty of borrowers so that you don’t have to experience any risky situation. It is done on your behalf. There are plenty of products available, each with different interest rates, risk levels and withdrawal terms. For example, you can invest £1,000 over a 2 years term at a fixed interest rate starting from 3.5% with a 1% charge on entire funds if you want to get your money early. Suppose you are considering becoming an investor, you should work with these plans with an independent financial adviser (IFA), so that you should have an idea about what type of investment you are making.

Is it Safe to Invest in P2P Lending?

Peer to Peer lending is also called an investment in loans. Similar to any type of investment, obtaining profits from P2P loans consists of some risk.

Each P2P platform is controlled by the Financial Conduct Authority (FCA). That secures lenders from the provider’s illegal activities. That makes way for safer investment opportunities.

Peer to Peer lending platforms performs an in-depth screening of all their borrowers. They analyse their credit profile by viewing their credit score and credit history. Also, they find out their spending choices, like how much they spend on online stores. Together with these details, the P2P platforms apply data analytics to determine the financial standing of the borrower. They assess the creditworthiness of the borrower by checking their job status, income and social background. That makes investing at the P2P websites safe due to the fact that the borrower selection process by the platform is reliable.

Plenty of leading Peer to Peer lending platforms has a big reserve of cash to secure many investors from the defaulting borrowers. That reserve is utilised to repay the lenders in case there are late repayments or when the borrower doesn’t pay back.

What are the Benefits of P2P Lending?

All those people who want to invest in P2P lending can obtain a decent return and that doesn’t require plenty of effort. That is because the platforms perform almost all the administrative and collections work. Also, the cash that the borrower earns from the P2P website is commonly categorised as income. The government can tax it, although most investors don’t pay any tax because of the personal savings allowance. With that feature, primary rate taxpayers can make up to thousand pounds of interest every year that is tax-free. This earning can be five hundred pounds for taxpayers with a higher tax rate.

How Many Companies are Doing P2P Lending?

There are plenty of leading Peer to Peer lending websites in the UK, with many launching every year. But the top three established platforms in the nation have as many as 240,0000 investors. Who accounts for profits worth billions of pounds for the UK’s economy.

How Much Can I Invest in the Peer to Peer Lending?

You can begin with any Peer to Peer lending platform with as much as £10, and there is no limit to the maximum amount you can invest. The Financial Conduct Authority (FCA) in the UK has applied a restriction for P2P investors who are lending for the first time to safeguard them from defaulting. As per the new rule, new lenders are not permitted to invest more than ten per cent of their spendable assets into a Peer to Peer lending platform. They can invest more if they have independent financial advice. FCA regulates all the Peer to Peer lending platforms in the UK, so all of them must conform to these standards.

If you are planning to become a P2P investor, it is necessary to start the undertaking by creating a balanced lending portfolio of other investments, so that you are tackling your risk. You should work with the IFA to opt for a P2P investment amount that is as per your budget, objectives and risk tolerance level. You should know the golden principle: you should never invest more than what you can tolerate easily financially. Consumers often tend to overlook the fact that they are not investing in an ordinary investment plan.

What to do?

So they should diversify when making investments to keep all their loans secure. They can do that by investing small amounts of money like £25 in eight hundred loans if they want to invest £20,000 in total. They can also distribute their loan amounts in four hundred or two hundred loans to reduce the chances of default. Suppose, for example, with eight hundred loans even if one or two loans default, they can make decent profits.

Conclusion

Peer to Peer lending has been growing as an alternative investment industry for the past many years in the UK. It works in a way that removes the banks between the investors and the borrowers by providing a platform on which people can lend cash and borrow straight from each other. This borrowing is performed either directly or partially directly.

P2P lending is also referred to as an investment in loans. Similar to any type of lending, obtaining profits from P2P loans has some risk.

The Financial Conduct Authority (FCA) controls each P2P platform. That secures investors from illegal P2P service provider activities. That facilitates safer investments.

4 thoughts on “How Safe is It to Invest in Peer to Peer Lending?

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