A Beginner’s Guide to P2P Lending

November 25, 2016

If you're a complete newcomer to peer-to-peer (P2P) lending (or you're interested, but have yet to take the plunge), then try this simple, 12-step guide to this thoroughly modern form of investing:

Why haven't I heard more about P2P lending?

Most likely because P2P lending is a relatively modern form of investing. It began with the launch of first-mover Zopa in March 2005, so the entire worldwide industry is just 11½ years old. However, UK P2P lending is booming, with over £1.37 billion of new lending in the first six months of 2016 alone.

Is P2P lending just like saving?

No, it’s different in number of key ways. The first thing to note is that P2P lending is investing and not saving, so buying P2P loans involves putting your money at risk. In other words, your money is not 100% safe and, as with other investments, you might get back less than you put in. Also, while savers can often access their money without notice, P2P lending is best regarded as a longer-term commitment.

Okay, so what is P2P lending?

Peer-to-peer lending involves lending to businesses (via secured or unsecured loans) and/or individuals (via unsecured loans). Returns for P2P lenders typically range from 3.5% to 7.5% a year (before tax and any loan losses not covered by loss-provision funds). Generally speaking, the higher the lender interest rates on offer, the riskier P2P loans will be.

Why lend my spare cash to people or businesses?

Because you receive higher interest rates than you could earn in any UK-based savings account, in return for accepting higher risk. With a well-diversified portfolio of P2P loans, you might earn, say, 6% a year before tax. In contrast, even top-paying five-year cash savings bonds pay just 2% a year before tax.

Is P2P lending covered by a government safety-net?

P2P loans are not cash savings, so your capital is at risk and your money is not 100% safe. Your money is not covered by the Financial Services Compensation Scheme (FSCS) (the government-backed safety-net that protects 100% of the first £75,000 of cash on deposit per person per UK institution).

Do I need to be rich to give it a go?

Not at all, because most P2P platforms -- the websites that match borrowers needing funds to savers with spare cash to lend -- have minimum investment levels of £10 to £20. Even better, the minimum investment across all five Assetz Capital accounts is just £1.

Can I invest in P2P tax-free?

The good news is that, since 6 April 2016, there is a new Innovative Finance Individual Savings Account (IF ISA) to allow P2P lenders to earn tax-free interest income. This IF ISA is broadly similar to the highly popular Stocks & Shares ISAs that have been around in one form or another since April 1999. The bad news is that, thanks to a big backlog at regulator the Financial Conduct Authority (FCA), most P2P platforms have not yet been authorised to offer IF ISAs to UK investors.

What fees do I pay?

Lender fees vary across different platforms, with some sites charging no fees and others levying upfront arrangement fees ranging from 0.5% to 1%. At Assetz Capital, we charge no direct fees to our lenders.

For how long do I invest?

This varies very much from loan to loan and platform to platform, but most P2P lending takes place over fixed periods lasting up to five years. At Assetz Capital, we list loans with maturities (durations) ranging from one month to five years or more.

What happens to the money I invest?

You lend it out to a broad range of borrowers and, to properly diversify (spread your risk), you should invest in as wide a range of P2P loans as possible. You can do this by building a self-selected 'pick and mix' portfolio of P2P loans, or by investing in automated accounts that do this legwork for you.

Once lent out, your original investment is returned to you via capital repayments, usually monthly or quarterly, but sometimes all in one go at the end of the loan. Likewise, your interest income is usually paid monthly or quarterly, but occasionally may be rolled up and paid out as a lump sum. You then decide whether to reinvest this stream of cash into new loans, keep it in your account for future use, or withdraw it.

Do I have any protection from loan losses?

To minimise loan losses for investors, many leading P2P providers offer accounts backed by ring-fenced loss-provision funds, usually funded by extra interest and fees paid by borrowers. When borrowers default on capital or interest repayments, these backstop funds can help to reduce loan losses and thus protect lenders' returns.

Can I buy and sell P2P loans in other markets?

P2P loans from one platform can be traded only through that particular platform. However, most sites operate secondary markets or aftermarkets that allow lenders to buy or sell loan parts (and even whole loans) from or to other lenders. The more active an aftermarket is, the easier it will be for you to increase or reduce your loan exposure. At Assetz Capital, we charge our lenders no direct fees for trading in our aftermarket.

Summing up the attractions and opportunities of P2P lending, Stuart Law, co-founder and CEO of Assetz Capital, adds, "By lending through Assetz Capital, P2P lenders can invest in a range of secured business loans from diverse borrowers and sectors, across a range of different interest rates, and over numerous time periods. Furthermore, we take no direct fees from our lenders and you can start investing with us from as little as £1. In addition, our market-leading platform makes P2P lending so simple, why not give it a try today?"

RISK WARNING: "As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if borrowers were unable to repay their loans. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan, with the added benefit of a discretionary Provision Fund for some of our investment accounts."