When it comes to my children, I do always worry a bit about what lies ahead in terms of financial security. The world just feels like an incredibly unstable place at the moment, both politically and economically. On top of that there doesn’t seem to be a way to stem the tide of escalating living costs.
Financially, things may not be as difficult as they were five or six years ago, but deciding what to do with any spare money is still a very tough nut to crack. The stock market is as big a minefield as it has ever been, but at the same time, the rates being offered by banks and building societies on savings and ISAs are absolutely derisory.
It was interesting to then stumble across peer-to-peer lending, a relatively new form of investing in the UK. As the name suggests, it simply involves lending money directly to fellow consumers who need a loan via an online platform; the incentive being an annual return usually in excess of 5% courtesy of interest repaid by borrowers.
The reason such attractive rates can be enjoyed is that there is no intermediary in the equation, and funds are matched on a pound-for-pound basis. The platform doesn’t lend out any of the capital from lenders as an aside for personal gain like a bank, and instead simply takes a nominal fee for facilitating the lending process – a fee typically covered by the borrower anyway.
The obvious risk to the above is that if the person you are lending to defaults, then the investment itself could be lost, especially given that capital losses aren’t covered by the Financial Services Compensation Scheme. However, platforms have pretty solid measures in place to counter this. For starters, there is a thorough review process for loan applicants, and only those with decent credit scores are approved.
The money you lend will also generally be spread across multiple borrowers to minimise risk, while it is mandatory for peer-to-peer lenders to have a separate reserve fund in place to cover any arrears and defaults from borrowers. And one platform – Lending Works – even has an insurance which covers lenders if borrowers default for typical reasons like unemployment, accident, death and illness, or even forces such as fraud or cybercrime.
In the decade of peer-to-peer lending’s existence here, it appears as though lenders haven’t lost any money through any of the more reputable platforms, even during the recession. P2P lending will also be included within a new ISA from April, meaning returns will be shielded from tax too. That, and the fact that it is now FCA regulated suggest it is heading towards the mainstream of investing.
Certainly it is something to ponder for us. I am always a big believer in diversifying when it comes to investment, especially when there are risks involved. But it does seem as though this one may well be worth dipping a toe into. Then again, investing is such a personal choice, and we all have different perceptions of value in terms of risk and reward. Nevertheless, it is comforting to know thatbetween the shocking returns offered by banks and the unpredictable stock market, there are good alternatives such as these.
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