It is an online platform where investors are connected with borrowers directly. The peer to peer lending firm pools investor’s funds and lends them to borrowers at different interest rates based on risk assessment. Typically, borrowers benefit from this kind of process as peer to peer firms might be able to offer quick access to finance or might be able to secure better interest rates compared to those offer by high street banks. Remember that all the individuals and businesses who borrow peer to peer loans have to undergo extensive credit checks and their creditworthiness is assessed by the platform. While some firms allow investors to perform their own due diligence, investors usually depend on the due diligence carried by the peer to peer lending internal credit control teams.
How does P2P lending differ to property crowdfunding?
While peer to peer firms allow investors to put money in debt instruments, the crowdfunding allows investors to take an equity stake. This means that the investor owns a proportion of the property in which they are investing.
How is peer to peer platforms different?
The main differences between p2p lending platforms are the following: Secured vs Unsecured (loans are not backed by assets) Loan term (how long the loan will last) Loan loss provision fund (the level of cover provider offers vs The expected bad debt) If loan is secured then what type of security it offers (i.e. business assets, property and personal goods) Manual vs Automatic investment (i.e. extent to which a lender allows hands-free investment)
ISA providers:
Peer to peer lending is a method where people can lend to businesses or individuals, removing the middleman, which is typically a bank. In 2016, the government recognized the growth of this industry by introducing an ISA to make tax-free investments and profits. Like other types of ISAs, individuals can invest up to £20,000 each tax year. A person can set up only one IFISA per tax year. A lot of Innovative ISA providers allow users to choose specific businesses, consumers or other projects to invest in. Other providers can take your funds and distribute it automatically over diverse loans, to keep a particular return and risk profile. Fees and returns differ based on the nature of the loan, the work that the provider puts in and the security that is in place. These lending platforms are not protected under the protection of the Financial Services Compensation Scheme that covers investments and savings in case the platform goes bankrupt. Some platforms set up provision funds to cover the investments. However, this doesn’t guarantee any money back, particularly with market conditions. With the majority of Innovative Finance ISA if users wait for the investment to run its term, they will not have to pay any other fees. But, if users opt to withdraw funds early or sell their investments to others, they will have to pay a fee. In order to do this, users need to find investors to buy their investments because they cannot be sold back to the platform.
