Is Peer to Peer Lending a good investment? 27/08/2019
In this current low-interest rate environment, many people are looking for new ways to try and make the most of their money. A popular new avenue for investment is peer to peer lending (P2P Lending) which on the surface offers returns that look incredibly attractive. The big question is whether peer to peer lending is a good investment? A good investment does not just mean great returns it’s a balancing act between risk and return. For example, investing in cryptocurrencies has had some of the best returns over the last few years but the risks associated with this new technology are just not worth it for the average investor.
How does peer to peer lending work?
On a basic level peer to peer lending is a process which brings individual lenders together with a borrower. In our case, the borrower is a business who is looking for a loan. Ablrate acts as a facilitator in this process managing the transactions and information between the borrowers and lenders.
What enables peer to peer lending platforms like Ablrate to offer benefits to both lenders and borrowers is cutting out the banks. This does, however, create some risks which we will cover later.
If you would like to learn more about the fundamentals of peer to peer lending, then check out our blog “What is peer to peer lending?”
Comparing peer to peer lending with other investments
So how does peer to peer lending compare with other investments? There are many different options from many different companies so let’s talk generally. This information will also get out of date very quickly, so this is just a snapshot for around the time this was written.
Some of the best savings accounts at this moment offer returns of up to 1% with additional bonuses if you don’t move the money in a 12-month period. This is not really an investment but a good starting point for comparison. Savings accounts are very often protected by the Financial Services Compensation Scheme (FSCS) and are very liquid, apart from if you are looking to get the long-term savings bonuses.
Fixed-rate bonds can offer increased interest rate over savings accounts, but they are fixed for a set term, normally 1 to 5 years. These are often protected by the FSCS which protects up to £85,000 of your savings at each institution. The main downside for this type of bond is that if you need to be able to access this money fast then you’re out of luck, you are locked in.
Stock market investing is a gamble if you are looking for short term returns. With this strategy, you can potentially get a great return on your investment but also make a huge loss. This also does not take into account the fees which go along with investing. However, if you apply the trusted investment strategy of long term investing and diversification, the stock markets are one of the best investment options historically.
Peer to Peer Lending:
At Ablrate we have average returns of around 10%-15%, but this can vary for other peer to peer platforms. This does, however, come with increased risk. Let’s break this down to get a better picture of the risks and how to reduce the impact of them.
What are the risks of peer to peer lending?
The main factor to consider with peer to peer lending is that the borrowers of these loans can default. Checks and process are undertaken before the loan is provided to members but unfortunately defaults do happen on occasion. Ablrate aims to mitigate losses in default by ensuring there is an asset backing the loans. Ablrate has been successful in recouping some of the potential losses in the past by liquidating this security or using the ability to liquidate assets to motivate the defaulting borrower to refinance the loan or pay off the loan.
Lenders investments are also not covered by the FSCS so if money is lost it’s not protected. This is very important to consider when investing. For more information about the risks of peer to peer lending please read our FAQ on the topic.
How to lower the risks of peer to peer lending
There is no way of removing all the risks associated with peer to peer lending, but you can help reduce the impact of them. This follows some of the fundamental principles of investing such as not investing more than you are willing to lose. Diversification is always a good option too as this helps ensure you don’t have all your eggs in one basket. This can be done via multiple loans or even multiple platforms.
Liquidity of peer to peer loans on Ablrate?
Many peer to peer platforms lock in your investment until the loan has completed, but some such as Ablrate provide a Secondary Market to increase liquidity. This secondary market enables investors to release capital if necessary, by selling their loans to others. This is also a useful tool to help diversify your investment further.
So is P2P lending a good idea?
Peer to peer lending can be useful for people looking for a better return than offered by more traditional savings accounts and investments. If you understand the risks and are smart with your money, then give it a try it’s just important to work out a balance for the returns you are seeking and the risks you are willing to take.