As peer to peer company loan books mature and interest rates fall due to increased competition, many readers have been asking me if I still think peer to peer lending is still an investment vehicle I would recommend. I now have realistic return expectations as many of my peer to lending investments mature. When I manually invested in loans, I now know that even the best due diligence couldn’t prevent capital losses because of the many overriding factors I have no control over (demand, supply, economy, valuation errors etc.).
So would I still invest through peer to peer lending? For now, my answer is yes and here are the reasons why:
Lender Return Rates Are Still Attractive
Advertised peer to peer lending net returns range between 3-25% depending on how much risk you are willing to take. Compare this to savings accounts paying about 1.3%, peer to peer lending makes sense in most cases.
Peer To Peer Lending Can Be Relatively Safe
When I visited several peer to peer companies, I found that some were operating as a subsidiary of much larger company umbrellas. These larger companies are extremely well funded and diverse, making their peer to peer arms a safer bet. Having said that remember there is always risk within every investment sector.
Peer To Peer Solves Two Issues
Prior to peer to peer lending, business funding was challenging. Small businesses were shunned by banks because their funding requirements were small and larger companies had to navigate through the stern acceptance requirements. The process was lengthy. Then along came peer to peer lending with a more progressive lending approach.
The two solved issues are:
1. Private lenders/investors need returns because savings rates are low
2. Borrowers need money to support and grow businesses or to fund deals
Facilitate the two and bingo, you have the birth of a peer to peer lending company. Peer to peer lending offers the average investor a chance to lend money and make a decent return. It also provides borrowers who don’t fit into traditional loan molds a finance gateway.
Because peer to peer lending provides solutions to major lending and investing issues, I believe the sector is here to stay and will continue to grow and innovate in both tech and finance. Even larger financial institutions are looking to dirty their paws in peer to peer lending.
The Returns Are Better Than Bank Saving Rates
Bank savings rates are still abysmally low. If you have large amounts of sitting in bank savings accounts for a long time, you will lose money to inflation as the cost of living and goods increase. If you need your funds in the short term, holding the money in a savings account can make sense, but if you don’t need the money, then you would be better off taking the necessary investment risks to grow your money using compounding interest.
If you were to deposit £25,000 in a savings account paying 1.3% interest for 5 years, you would end up with approximately £26,678. If you invest in peer to peer lending paying a modest 5% interest, you would end with approximately £32,083, a difference of £5,405. That’s the power of compounding interest.
Peer To Peer Lending Is For All Investor Levels
With the diverse company lending options now being offered, there are lending products for everyone with the very basic understanding of peer to peer up to your most advanced investor.
Basic investors might not have the time or expertise to analyse loans and can, therefore, choose auto-invest, set and forget peer to peer lending products that Assetz Capital, Kuflink, Lending Works, Unbolted, Funding Circle, and Landbay offer.
Advanced investors can achieve higher interest returns by selectively analysing business and property development loans offered by companies such as Assetz Capital, Moneything, Ablrate, Lendy, and Funding Secure.
There Are Good People Founding Peer To Peer Companies
Writing this blog allows me to access many of the founders of peer to peer lending companies. Many times when I speak with the company founders, I’m able to obtain a sense of character and I have to say more often than not, the entrepreneurs running the companies are generally good people who care about their investors.
Does this mean I think all peer to peer companies are being run ethically, transparently and in the lenders’ best interests? Of course not, but for the most part, I feel a general sense of good moral character being exhibited by company heads. The financial industry has a reputation of being infested by money hungry, dishonest types, so when I speak with a CEO who is transparent, honest and who has a genuine desire for his investors to benefit and succeed, it gives me the warm and fuzzies.
Setting Up A Peer To Peer Lending Company Isn’t Easy – That’s A Good Thing
I’ve asked many financial CEO’s if starting and running a p2p company is easy and they all answered a resounding “no”. There are so many challenges involved including:
- Creating a startup brand and persuading lenders to invest their hard earned money through the brand
- Expensive tech and business startup costs
- Making sure the business can become profitable without charging both lenders and borrowers too much in fees
- Jumping through the torturous and expensive hoops to gain regulatory FCA authorisation
- Continuously complying to regulatory rules or be shut down
- Competing for loan business against many finance companies and banks
- Maintaining a good demand and supply balance between lenders and borrowers. Lenders are fickle and can lose confidence and jump ship quickly
- Screening loans to make sure the default chances are low and the borrowers aren’t fraudulent
- Making sure RICS valuations are accurate
- Making sure building works are proceeding on schedule and on budget
- Taking over defaulted loans, some of which are property development loans in mid-build
- Fielding lots of customer service phone calls from lenders wondering why their accounts are 7p short on interest
You get the idea….
Much goes into creating and operating a peer to peer company and the people running them have experienced many regulatory and financial headaches to make their business dreams a reality. This is good for you as a lender as you don’t want to invest money through unregulated businesses that are easily set up as they could disappear with your money overnight.
Peer To Peer Lending Is Better Than Private Company Bonds Or Mini-Bonds
I often receive emails from readers asking me what I think about companies offering bonds that pay a fixed interest rate of return. I’m not a fan because these bonds are usually unsecured and when you invest in a company bond or mini-bond, you are investing money directly into the company which is risky. If the company goes out of business (which does happen), bond investors are usually treated as unsecured creditors and are at risk of losing their capital. To top it off, bond rates aren’t even that attractive with most bond offerings paying between 3.5-7%.
If you are going to take risks, it makes more sense to invest through reputable FCA regulated peer to peer lending companies offering secured loans that pay equal or more interest than private bonds pay.
You can read more on why I dislike mini-bonds here.
Peer To Peer Lending Operates Like A Bond
When you buy shares, unit trusts or my favourite index trackers, you run the risk of your original investment capital falling if the stock market falls. With peer to peer lending, it’s possible for your capital to remain constant as you receive interest, just like a bond. The times when your original peer to peer capital may be reduced if you experience default losses which is also possible.
Peer to peer can be useful for investors looking for monthly income payments.
You Can Save On Your Taxes
There are tax benefits of investing through peer to peer lending and property crowdlending including the tax-free IFISA wrapper, the possibility of writing off defaulted loan losses, and using your annual non-taxable interest allowance. (Talk to your accountant to what tax benefits are at your disposal.)
High Street Banks Are Still Archaic
Bank lending is archaic. High street banks usually won’t give your Uncle Stan a loan to help his small business grow and if they will, they will make Stan jump through so many paperwork hoops that he’ll eventually give up on the application process.
Peer to peer lending companies thrive on loaning businesses and property developers’ money. Peer to peer can efficiently escalate the lending process so the business receives their funds within a much shorter time versus high street banks. This is particularly good for property developers’ who may need to move on a deal quickly.
Peer To Peer Lending Gives You Control
Most conventional investors use managed unit trusts and mutual funds as part of their retirement portfolio. When you invest in a managed fund, you have no control over the funds’ portfolio content. Only the fund manager who is guessing *ahem* I mean picking the stocks has portfolio control.
Knowledgeable peer to peer lenders can have complete control by choosing which types of products and loans make up their portfolios.
Peer To Peer Is A Perfect Diversification Option
Most regular folk have limited investment options usually consisting of bank savings, stocks and shares, unit trusts / mutual funds and property. Peer to peer lending offers an extra layer of diversification for those of us regular folk who don’t have piles of money to invest in private real estate deals or other high net worth alternative investments.
Every single investment method has its pros and cons, including property (high cost of entry, increased stamp duty taxes, landlord headaches), stocks, shares and funds (if the market crashes, your capital and emotions could spiral downwards), and bonds (returns are low).
Peer to peer lending is not without its issues. Only one company Zopa has operated and survived during the 2008 financial crisis. Some companies are complicated to understand and have a higher investment learning curve. If you invest through the wrong companies, don’t diversify correctly, only choose high risk/reward loans chasing returns or select the wrong loans, your returns could be in the red. But if diversify correctly by spreading your money across several companies and loans, peer to peer lending can be a very positive investment vehicle.
So if I were a beginner starting from ground zero, would I still use peer to peer lending as one of my investment vehicles? Absolutely.
If you are new to peer to peer lending and want to learn more:
As always, if you have any questions, please contact me.
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Disclaimers: I’m not paid by any of the companies to write these articles, nor am I employed by any of the companies I write about. In most cases, I have invested or continue to invest my own money through these companies. The sign-up links on this website are referral links. When you sign up for an account through my website, I receive a referral fee directly from the companies, at no cost to you. Your support enables me to continue to operate the Financial Thing website. You can read more about my referral links here.
** This page is for information purposes only and should not be regarded as investment advice. Opinions expressed in this article are only opinions based on my own personal experiences. As with any financial investment, peer to peer lending involves risks and it’s possible to lose money so never invest more than you can afford to lose. If you are unsure about investing, it is advisable to consult a financial professional **