Case study: We meet up with lender Stephen
Stephen is a 44-year old mortgage adviser, and currently resides in the Highlands of Scotland in Inverness-shire with his wife and son. He has been in the financial services industry for over two decades, although has been self-employed for the last 16 years. As a keen and knowledgeable investor, peer-to-peer lending is something that he began to look into a few years ago. We caught up with him to hear about his thoughts and experiences regarding P2P and all things finance…
Discovering peer-to-peer lending
I do like to have a look at what investments/savings are out there from time to time, and have dabbled in all sorts of things from fairly complex structured bonds to a couple of barrels of malt whisky. Even if that one doesn’t make a good profit, I can drown my sorrows pretty well at the end of the day!
But in all seriousness, I had become frustrated for years with sub-inflation returns from bank savings accounts, and the manic nature of stock market investing (which for myself, at least, tended to result in sizeable losses). Having come across it online and in various associated articles, I decided to look more closely into peer-to-peer lending a few years ago.
I soon realised that the risk/reward balance was impossible to beat. I now have over half my savings in P2P, and have to admit to enjoying seeing my balances increase steadily each month.
Dealing with risk, and some advice
Initially I was slightly wary about the concept of P2P lending, but I was soon very encouraged to learn about some providers’ risk-minimising techniques such as provisions funds and thorough credit checks. In the case of Lending Works, the insurance proposition on top of such things carried particular appeal.
For me, the risk aspect is something that I am comfortable with. I appreciated that for peer to peer lending to go ‘wrong’, it would require a serious meltdown of the UK economy. Something like a very deep recession or world war-type scenario. Nothing is impossible of course, but most non-cash investments would be compromised in a similar way with the same extreme conditions.
My advice to anyone considering P2P lending would be that, if you are unsure initially for any reason, try it out with a modest sum to get a feel for how it works; then, when more confident, build from there. But always keep a decent spread of investments all round.
Bear in mind though that although cash holdings in a bank, for example, are deemed to be ‘super safe’, in my book they have an almost guaranteed risk of losing money in real terms over time. They tend not to keep pace with inflation and you constantly have to keep a diary for when your incentive rates are ending. It’s a lot of work for very little return.
Impact of Brexit on P2P and the economy
Overall, I see, ‘Brexit’ having a slightly negative affect on what rates I can get from peer to peer, just the same as bank accounts. Lower rates on the back of a feared slower economy feeds into what returns you can get from a lending point of view.
It can be argued that lower interest rates are better news for shares as company debts are cheaper to service, which in turn leads to higher profits. But this argument may be offset against lower expected earnings on the back of economic uncertainty, and in my personal experience, I have not had a happy time of it investing in shares over the years - whatever the prevailing rate of interest!
Innovative Finance ISA and taking advantage of tax efficiencies in P2P
As someone who invests in P2P, the ISA is obviously an exciting prospect, and any tax saved will be most welcome for sure. I will be slowly transferring my maturing Cash ISAs’s to peer to peer ISA’s when they mature. I may as well save the most tax from the source that pays me the most interest!
I can see myself having up to 60% of my investments in peer to peer after the introduction of the ISA, and I will be keen to slowly flush out my non-ISA peer to peer holdings over time to have as much tax free as possible.
Looking ahead to retirement
I can honestly say that I am intending on using my P2P investments to help me retire much earlier than I would previously have thought possible. Aside from financial security, I want my golden years to be filled with plenty of travel and leisure.
I have been lucky to travel a fair bit over the years and have seen some amazing places. But to be honest, the day I do retire, I will probably spend that day out on my mountain bike, having a round of golf, or climbing a Scottish mountain. Something simple that I struggle to find enough time doing when I’m working so much!
My wife and I also fancy taking time to hire a campervan and touring down through the whole of Spain, checking out some of the lovely small towns and villages along the way. Three to four weeks would be nice, rather than the usual two weeks max before dashing back for work commitments!
The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.