How to Get Started With Peer to Peer (P2P) Lending 09/07/2019
So, you have been looking for ways to make the most of your money, but banking interest rates are just not doing it for you. Peer to peer lending can offer a great solution to this problem but how do you get started with investing in these loans? It’s also important to remember that unlike a bank your investment isn’t secure, so capital is at risk and loans are not covered by the Financial Compensation Scheme.
If your first question is what’s “P2P lending?” then we would suggest you read our previous blog “What is peer to peer lending?”. This blog breaks down the basics gives you some history of this industry and provides some useful links to further reading.
Find a platform that works for you
There are many platforms out there offering several different methods to get started with peer to peer lending, such as the ‘diversified portfolio of loans’ model or self-select loans. The portfolio model is used by a few platforms where the lenders deposited funds and the platform chooses which loans those funds are invested in, in some case via general instructions that a client and input. This is known as ‘auto investing’ on most platforms. An issue with this method is that users are provided with very basic knowledge of where their money is going. They are often set up into bands of risk with different projected returns. This can leave the investor in the dark around where their money is going but is good for people who don’t want to spend time researching the companies provided by a self-select loan.
At Ablrate we primarily provide loans for individual organisations for lenders to invest in, this allows users to do their own research on the borrower to better inform them about potential risks and if it’s the type of business they would like to support. An example of when this would be useful would be if you want to make sure the loan is for a green company you can find out easily. This information is provided in many ways, from a simple company overview and videos to more in-depth documentation around company financials. This method of self-select loan often provides a higher average return but does not automatically diversify your investment.
Another option to consider is an IFISA, this allows individuals to use some of their annual ISA investment allowance to lend funds through peer to peer lending, whilst receiving tax-free interest and capital gains. You can learn more about this on our Ablrate IFISA page.
Registering to your platform of choice
Once you have found the platform that best suits you, the next step is to register. As you are dealing with financial services there are some personal details you need to provide. This regulatory obligation is primarily around Know Your Customer (KYC) which is to make sure all lenders are verified; we do this to protect Ablrate and the lending community as a whole.
Once you have registered the next step is to fund your account. The most common way this can be done is by debit card, on the Ablrate platform this is instant. The other way of adding funds to your account is via bank transfer which should be in your account within 2 working hours. Ablrate does not take payments from credit cards.
From December 9th 2019 you will need to pass an ‘Appropriateness Test’. This will be a series of short, multiple choice questions to gauge your understanding of P2P lending aimed to make sure that investing in loans is suitable for you.
What are the risks?
Peer to peer lending isn’t for everyone and like with many investments there is a risk to your capital and future interest payments. The main risk is that if a borrower defaults there is no guarantee that the company running the platform will be able to liquidate the asset for the full amount you have invested or even liquidate the assets in a reasonable amount of time. The best way to minimise risk is following some of the fundamental principles or investing, diversify your investments, do research and most importantly only invest money you can afford to lose.
Getting involved in peer to peer lending is reasonably simple but like any investment, you should not rush into it. Do your research and if possible, investigate the company you wish to help fund a loan for. At Ablrate we are here to help you get started with peer to peer lending if you have any questions you can visit our FAQ or contact us with any additional queries. We provide in-depth information on our loans and even provide a secondary market to allow you to buy and sell loans to release your capital should you need to. Want to get started? Visit our Registration page.