Peer to peer lending offers an exciting way to invest your money and receive annual investments of up to 15%, by lending out your money to people who are looking for short-term loans.
Emerging in the US in 2006, there are a handful of peer to peer lenders, also known as P2P lenders, that simply act as a middleman for those looking to borrow money and individual investors who are looking to get a healthy return on investment.
The lender effectively acts as a portal, matching borrowers and investors, usually based on factors such as income and credit score, where the riskier customers can offer the highest returns up to 10% or 15%, and the less-risk, good credit customers can offer returns from just 3%.
All borrowers and lenders are anonymous and your investments are often pooled across many individuals so that you are well-diversified and can earn the expected return.
So is Peer to Peer Lending Safe?
Yes, peer-to-peer lending is a safe way to invest your money and the potential returns are considered much higher than the savings accounts offered by banks.
In the UK where peer-to-peer lending is very active, the industry is regulated by the FCA, but not covered by the financial services compensation scheme – so any losses are covered by the firm through a provision scheme and not from your bank. There are over a dozen peer-to-peer lenders in the UK and they are well-respected and established companies, including Zopa, Ratesetter, and Fund Ourselves.
In the US, the industry is monitored by the SEC and each firm will require approval and ongoing compliance to continue trading.
You can invest as little as £10 with UK lenders and $25 in the US and it is very transparent in terms of how much you could potentially earn by locking in your investment for a minimum of one year.
Dan Kettle, founder of Pheabs, commented: “Yes, peer to peer lending is very safe and it is very established and mature in the UK. A lot of people and even businesses invest with peer to peer lenders as part of a diversified investment portfolio, sometimes using multiple lenders at once.” He added: “You always consider that your final return is maybe not always as expected, but it is not always far off.”
What Happens if My Borrowers Do Not Repay?
If your borrowers do not repay, this may impact the final return on investment you receive, hence the peer to peer providers are very transparent when they discuss your average or estimated returns.
Like any other loans provider, each company will have a customer service team who will follow up on bad debts and missed repayments – so you can find additional returns trickling in several weeks or months later.
Plus, each lender will have a provision fund in place which reserves money aside for any loss of earnings and this can help to achieve your expected return.
The main risk is if your lender goes into liquidation, because then you may have a long journey to recover your funds through a provision scheme or through settlements.”
DISCLAIMER: This article was written by a third-party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
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