When it comes to investing, there are numerous questions that need to be asked, and lots of things which need to be properly understood before committing your hard-earned money
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 reserve fund in the event of missed payments and defaults. This is a good safety measure, and certainly helps to minimise the risk. But is it enough?
We at Lending Works believe not. As such, we’ve created the unrivalled Lending Works Shield. Our Shield has insurance against the most common types of borrower default including accident, sickness or death, loss of employment, cybercrime and fraud. It’s something no other P2P lender offers, and is also coupled with our reserve fund that covers arrears and defaults not covered by the insurance.
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.
Related articles:
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.
For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
The housing crisis in the UK is widely mentioned in the media, but the extent of it is often underestimated.
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.
As the tax year end approaches, the financial services industry readies itself for a flurry of activity. That's in large part because, with just a couple of months to go, the so-called 'ISA season' is upon us.
Featured
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 idea of peer-to-peer (P2P) lending is a simple one; you lend money to those who wish to borrow, with a view to receiving a great return for doing so.
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.
Most popular
The starting gun has been fired to seek out Mark Carney's successor as Governor of the Bank of England (BoE), but he will nevertheless remain in his post until January 2020.
The vexing issue of social care, set against a backdrop of an ageing population trying to sustain itself, refuses to go away, and policy ideas invariably prove divisive.
On a daily basis, diligent readers of financial publications consume a wide range of economic data, which act as key performance indicators regarding the state of the UK economy.
On 13th January, the open banking era completed its first year in existence, so it represents a natural juncture to reflect upon the past 12 months
Perhaps the word 'fanfare' would be overstating the recent response to an uptick in UK savings rates.
Clearly there is one story which is dominating the headlines at the moment: Brexit.
