Not so long ago, if you wanted to borrow money you went to a bank, a building society or a finance company, but since 2005 there’s been a new kid on the block in the form of peer-to-peer (P2P) lending. This allows individuals to invest money which is then lent out to others. Savers get a better interest rate and borrowers get a more flexible attitude than that offered by more traditional lenders, so if you have money to spare why put it into P2P?
1. Low Savings Rates
Even the best bank accounts are now only paying around 1 percent interest and instant access accounts will, in many cases, only get you 0.25 percent. It’s no surprise, therefore, that many savers are looking for more lucrative places to put their money.
2. Manageable Risk
P2P lending is riskier than putting your money into the bank, but most lenders allow you to choose a level of risk you’re comfortable with. Plus your risk is spread – not all of your money will go to one person, so the risk of loss is minimised.
3. Helping the Community
Because P2P lenders can take a more flexible attitude to lending, it helps people such as the self-employed who might otherwise struggle to borrow. Those who do and want to get their debts under control could seek an Individual Voluntary Agreement. By lending to smaller businesses that banks may be reluctant to deal with, P2P lending helps the wider economy too.
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- Growing Popularity
The UK P2P lending market is set to be worth £16 billion by 2020. Not only does it offer investors a higher rate of interest than they can get elsewhere, the launch this year of P2P ISAs means that they can enjoy their earnings tax free. It seems likely that you’ll soon be able to hold P2P funds in a self-invested pension too.
5. Spreading Risk
The ups and downs of the stock market, particularly since the Brexit vote, have made many people wary of investing too much of their savings in one place. P2P lending is riskier than leaving the cash in the bank, though the returns are greater. It also offers a return over a short period – two or three years – where the stock market usually needs a longer commitment.