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When it comes to expanding your investment portfolio, it helps to learn more about all the products available on the market.
There are many avenues you can pursue to grow your investment portfolio, one of which is Peer to Peer lending, a relatively simple way to invest your money.
Today, we’ll be exploring just how Peer to Peer lending compares to other investment types on offer.
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What is Peer to Peer Lending?
Peer to Peer lending is a modern investment option that pairs up investors and borrowers through a user-friendly online portal. All fund transfers take place in the digital space, making the sign-up process simple and straightforward. The investments – which may include personal, commercial and secured loans, depending on the provider – are assessed by the Peer to Peer platform, making this a suitable option for new investors with limited experience. Be sure to speak to a qualified independent financial advisor if you need further advice.
Peer to Peer Lending vs. Other Types of Investments
Peer to Peer lending differs from other types of investments in terms of expected returns, the investment approach, minimum amount and period, as well as overall accountability:
Expected Returns
Peer to Peer lending gives investors the opportunity to earn competitive returns (depending on the provider), largely because this type of investment is typically considered higher-risk than others.
A lot of providers offer quick and accessible loans to small businesses and landlords who need to service their loans on a regular basis – this means P2P loans offer slightly more predictable returns than stocks and shares, but as there is the possibility that a borrower defaults, your capital is still at risk.
Don’t simply compare providers on their expected return. You should also consider security, exit strategies, past performance to name but a few. You are investing in more than just the headline return rate.
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Investment Approach
Peer to Peer platforms allow investors to invest their money directly through the online platform. Hands-on investment options allow you to easily review specific deals and decide how much money you would like to invest based on the details of the loan.
Auto-investment options automatically spread your funds across a wide range of projects, leaving the vetting process in the hands of the P2P platform. This option requires minimal time investment and experience while lowering your risk exposure.
Minimum Investment Amount
The minimum investment amount for Peer to Peer lending is as little as £100 with some providers, making it a very accessible investment option. It allows investors with limited budgets to enter the market and gives seasoned investors the opportunity to try their hand at Peer to Peer lending and experience its benefits.
Alternative investment options such as stocks and shares may offer a low minimum investment amount too, but dealing costs tend to cut into your profits to a point where a small investment may become unviable.
Period of Investment
Peer to Peer investments are entered into for a specific length of time, which is decided in advance. If a loan is repaid early, investors get access to their returns instantly. Remember that with all investments of this nature, capital is at risk and delays are a possibility.
Early withdrawals may be possible depending on the provider, provided that another investor is available to take over the loan. Access to cash may be more restricted in other types of savings and investments, with penalties imposed to dissuade investors from doing so.
Accountability & Risk
Similar to other types of investments, the expected rate of return is determined by common factors as outlined by the platform itself, including applicant credit score, credit history and income. With the P2P platform assessing each loan, investors know that their money will go to a thoroughly checked debtor. There is, however, no guarantee that all borrowers will make their payments on time, and there is always a risk of default. If the lending platform shuts down altogether, investors may lose the majority of their investments, especially if the loan was unsecured.
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What is the Best Way to Invest Money?
Knowing the right place to invest to meet your own financial goals is an important first step in making your first or next investment decision. Peer to Peer lending is a great way for investors to diversify their portfolios in the short, medium or long term.
British investors who are interested in P2P lending can benefit from the Innovative Finance ISA – a government-backed arrangement that gives investors the opportunity to earn tax-free returns on up to £20,000 of P2P investments each tax year. Remember, HMRC tax rules apply to IF-ISAs and may be subject to change and as always, capital is at risk. Kuflink* is a popular IF-ISA provider, offering returns of up to 7% pa for investments, with options of 1, 3 or 5 year commitments*.
Peer to Peer Lending is a viable option if you’re considering a more modern investment approach with attractive prospective yields. Remember that, as with all investments, your capital is at risk. Always choose a reputable provider.
*Kuflink is not protected by the Financial Services Compensation Scheme