Peer to Peer (P2P) Lending
What is it?
Peer to peer (P2P) lending uses the Internet to match up people and businesses who want to borrow money with those willing to lend it. In effect, P2P firms cut out the middleman (typically a bank) and charge a fee for their efforts.
Since lending money to just one individual or business could be risky, P2P lenders tend to spread their money across a basket of borrowers to reduce the impact of a borrower failing to pay interest or the money borrowed.
The potential benefit for savers is that they may receive a higher rate of interest versus putting money in a bank or building society savings account.
But on the downside if a borrower doesn't pay back your money you lose it (i.e. a bad debt) and you cannot reclaim losses from the Financial Services Compensation Scheme (FSCS).
From April 2016 P2P lending accounts have been allowed to be held within ISAs.
How safe is my money?
It's only as safe as the people that you lend your money too. If they don't repay your interest or money loaned you'll lose it.
It's vital to remember that however you lose money via P2P lending, its not covered by the Financial Services Compensation Scheme (FSCS).
Some P2P lenders have their own 'safety' funds which aim to help cover losses when borrowers fail to repay their loans, but there is no guarantee such funds will cover any losses you incur so you cannot fully rely on them.
How does the tax work?
The interest you receive is taxed in the same way as savings interest. Note that any losses you incur cannot be used to offset any capital gains you may have made on other investments.
Is P2P lending worthwhile?
P2P lending is still relatively new and returns so far have typically been a few percent higher than savings accounts (net of bad debts). However, this has been over a period where interest rates are low
and most borrowers are likely to have had enough income to repay their loans thanks to rock bottom mortgage rates. If we see mortgage costs rise or the economy decline significantly then P2P lending bad debts
could rise significantly hence dent returns.
On balance P2P lending is certainly worth consideration, but it's very important not to ignore the risks.