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P2P lending: Dispelling the risks
Many people hold a fear of the unknown, and given that peer-to-peer lending (P2P) platforms in the UK are considered to be the new kid on the block, it’s understandable that they are often approached with a degree of caution. In fact, only 2% of people who regularly save in the UK currently lend money through a P2P platform, which really highlights how little is known about this relatively new concept.
This isn’t a great surprise though. Despite the fact that it has been around for a decade, the industry itself is still very much in its infancy.
Yet on the plus side, a recent report conducted by Nesta and the University of Cambridge showed that funds invested by lenders doubled to £1.74 billion in 2014, which demonstrates the rapid growth potential of the sector.
What are the risks?
The biggest risk for lenders on peer-to-peer platforms is borrowers defaulting on their loans. Lender money invested in P2P platforms is not protected by the Financial Services Compensation Scheme (FSCS), which, in the event of a bank collapsing, guarantees up to £85,000 is returned to each saver.
However, with greater risks come greater rewards, and interest rates from P2P lenders are generally significantly higher than those offered by banks, with peer-to-peer platforms offering interest rates of up to 10%. It’s the age-old ‘risk vs reward’ balance, and it’s a decision every lender has to make individually.
There are other risks of course. Cybercrime has become a significant threat in the modern age, while the chance of a major economic downturn such as a recession is a phenomenon with which we are all intimately familiar. These are things that every lender should consider.
So how are risks minimised?
Many peer-to-peer lending platforms offer assurances that lenders’ funds will remain safe, usually by diversifying lender capital among many borrowers and/or offering a contingency fund in the event of missed payments and defaults.
Since April 2014, all P2P lenders have been regulated by the Financial Conduct Authority (FCA). At Lending Works, we have welcomed this additional scrutiny as we take the role of looking after our customers' money very seriously. We recognise that the FCA is here to protect consumers, and we are here to deliver the best service possible.
In Summary
What people do with their money is a very personal choice. Some people like to take on a managed risk, while others prefer a safer option. At Lending Works, we believe we offer a good mix of the two, with great interest rates and unparalleled protection for our lenders’ money through the Lending Works Shield.
Keen to find out more about lending with Lending Works? Check out our lending page or give us a call on 020 7096 8512.
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Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
As with all investments, your capital is at risk.
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The Lending Works Shield does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The Lending Works Trustee has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Lending Works Shield when considering whether or how much to invest. For more information click here.