So this is my first post on my new blog! I figured the first post would be about my investing passion which is peer to peer lending. Here is an overview and history of. What is peer-to-peer (P2P) lending? With interest rates on savings accounts and cash Isas struggling to beat inflation, many savers are thinking about putting their money into riskier investments that offer a better rate of return. Peer-to-peer lending is similar to saving with a bank, but pays much higher rates of interest. But unlike a traditional savings account, you can lose money. Peer-to-peer lending sites match up savers, who are willing to lend, with borrowers - either individuals or small businesses. By cutting out the middleman and not having the overheads of traditional banks, peer-to-peer sites can often offer you more favorable rates, whether you're a lender or a borrower who has struggled to get a personal loan elsewhere. How does peer-to-peer lending work? You invest through a website, but lenders work in different ways. Some allow you to choose who to lend to, while others spread your investment out on your behalf. Borrowers are credit-checked by a credit reference agency, and also have to pass a peer-to-peer site's own credit-worthiness tests in order to qualify for a loan. Some lenders allow you to choose the credit-worthiness of a borrower - choosing a riskier person often results in higher rates. The sites also take care of collecting money from borrowers. Is peer-to-peer lending safe? By being connected directly to someone who wants to borrow, the most immediate risk to your money is if a borrower fails to repay what you've lent them (known as 'defaulting'). Sites manage this risk in different ways. Zopa, for example, splits your investment into £10 chunks, to be spread out across multiple loans. This helps spread risk, and means that if one borrower fails to repay, your whole investment doesn't take a hit. Zopa and RateSetter offer compensation funds which should automatically cover you if a borrower defaults. However, these compensation funds are not infinite. It's possible that in a crash where lots of borrowers default at the same time, they could run out of money, although it hasn't happened so far. Indeed, Zopa's newer products are not covered by its compensation fund. Funding Circle takes a different approach: there's no compensation fund, but there are higher returns on offer. Most importantly, peer-to-peer sites aren't covered by the Financial Services Compensation Scheme (FSCS) which guarantees your savings with banks and building societies up to the value of £85,000. Peer-to-peer sites – what to watch out for If you're a lender, there are a few things you need to watch out for when using peer-to-peer lending sites: RateSetter and Zopa show the rates of return you can expect after they've deducted their fee. On Funding Circle, the rates you see usually don't include their 1% annual fee. You'll need to weigh up the risk of losing some or all of your money. The risk is likely to be lower if there's a compensation fund. Some peer-to-peer lending sites will allow you to withdraw funds early if you wish to, although there will be a fee.
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AuthorHi, I'm Laurence. I decided to write this blog to document my FIRE journey and investment experiences, specifically in Peer to Peer lending. Every month I'll post a review here on some of the various Peer to Peer lenders I intend to be investing with and information about my FIRE journey. ArchivesNo Archives Categories |