Peer to peer lending has become very popular in the UK for some decades. It is also known as P2P lending, in which loans are funded by individual investors. More and more people are getting into this type of investment because it offers high-interest rates. Let’s see what exactly peer to peer lending is and how it actually works.
What Is Peer to Peer Lending?
Peer to peer lending is relatively a new type of investment compared to bonds and stocks. It matches borrowers to the people who have money to lend. P2P lending is beneficial for both the lenders and the borrowers. As an investor, you can earn higher interest rates than the traditional bank loan. At the same time, borrowers can get funds easily when high street banks or other financial institutions turn them down. There is no middle man or bank involved in the lending process. Normally the lending is carried out online through peer to peer platforms. P2p lending is a great alternative to traditional lending through banks or credit unions.
How Does P2P Lending work?
Peer to peer lending platforms connect investors to borrowers. These borrowers can be individuals or small businesses. Many online P2P platforms are present in the UK, and these platforms act as the middle man between the borrower and investor. P2P platforms provide high-quality services and earn money in the form of fees that they charge from the investors and borrowers. The investors need to make an account on a P2P platform of their choice. Once the account is open, they can deposit funds and start lending to the borrowers. P2P platforms take care of all the aspects of lending, such as checking the trustworthiness and credibility of borrowers.
How Covid-19 Affected P2P Lending?
Covid-19 has affected almost every sector badly and similarly peer to peer lending. This pandemic made p2p funds unavailable as many people lost their jobs during Covid-19, so the risk of borrowers defaulting also increased. That is why many investors withdraw their investments from peer to peer platforms. It is difficult to predict what will happen if a recession hits. However, with time things are coming back to normal, and we can hope that peer to peer lending UK will also return to its normal soon.
Is It Worth Investing In P2P lending?
The interest of investors is continuing to rise in peer to peer lending in an environment where it becomes difficult to earn interest from fixed-rate assets. P2P investment offers a high-interest rate with other advantages that are as follows:
Peer to peer platforms allows investors to choose from a variety of loans to invest in. They can also select the borrowers and set specific criteria for lending. There are a few restrictions allowing lenders to have more control over their investment.
In peer to peer lending, you can invest money in different loans instead of investing the whole amount in a single loan type. It helps you to mitigate the risks. For example, when you invest in multiple loans, even if a borrower defaults, you will not lose all of your money and can keep getting profit from the other loans.
High Rates Of Return
The major advantage of peer to peer lending is the high rate of return. Many investors report that they get annual returns of more than 10%. Some lenders start getting monthly payments from the next month of investment. Thus it can be a steady source of income.
Easy to Invest
P2P lending is user friendly compared to other investment types. Investors find it more convenient to invest through online platforms. All the systems, from investing money to borrowing funds and receiving monthly payments, are online. Also, you do not need to be a financial expert to start investing.
Is It Safe To Invest In Peer to Peer Lending?
Peer to peer lending is different from traditional investments like saving accounts or bonds. However, like other investments, P2P lending is not free of risks. Along with benefits, it also has some drawbacks. Here are some risks that you should keep in mind before investing in P2P lending.
Risk Of Default
The biggest risk in P2P lending is the risk of default. Most of the peer to peer loans are unsecured, and if a borrower defaults, you may lose all your money. However, some P2P platforms have contingency funds to cover you in such situations. But keep in mind if multiple borrowers default at the same time, these funds can not help you.
P2P Platform Busts
If the lending site goes bust, there are chances that you will face difficulties in getting your money back. It may occur that the lending site takes too many loans and can not be taken to repay and become bankrupt. However, the chances of such risks are very low compared to borrowers defaulting.
Funds Not Lent Quickly
Sometimes the platform cannot find a borrower that meets your lending criteria, and you have to wait longer to earn profit. Moreover, it can be time-consuming to manage a diverse investment portfolio. However, p2p platforms now offer auto investment options that help you to time and manage your portfolio.
No Protection By Government
Another risk of peer to peer lending is that the P2P loans are not protected by the Financial Services Compensation Scheme (FSCS). So, if you lose your investment, the government is not responsible for compensating for your loss. However, all the P2P platforms are regulated by the Financial Conduct Authority and are restricted to follow best lending practices to reduce all types of risks.
Peer to peer lending offers a lot of benefits, but it does not mean they are free of risks. Therefore, it is essential to think beyond the high-interest rates while investing in P2P lending. There are many peers to peer platforms in the UK. The interest rate and fees vary from platform to platform, so we suggest you shop around and find a platform that offers a high-interest rate and follows best lending practices. Peer to peer lending can be the best way to invest and earn a steady income if you understand and learn to manage the risks.