For the past 10 years the bank base rate has been incredibly low. Back in the early 00s the interest rate set by the Bank of England hovered around 4 to 6%. Today, it hovers around 1%.

The base rate acts as a benchmark for interest rates in general, meaning investors are constantly on the hunt for ways to make their money work harder for them. Undoubtedly one of the front runners for many investors is peer-to-peer lending.

What makes peer-to-peer lending different?

Contrary to popular belief, there is nothing new or alien about P2P lending; it is actually a revamped version of one of the financial world’s oldest asset classes. Virtually anyone can become a P2P investor and benefit from the high interest rates that have typically only been available via banks.

What is different is the coming together, via a platform, of those who want to invest and those who want to borrow money. At Huddle Capital we match investors with SMEs who need financial support to grow.

Cut out the bank

Many people forget that the small amount of interest accrued on accounts with banks is because it is being lent out. Your money provides banks with the capital for lending. This means your money could be funding a mortgage or other type of loan for someone, somewhere. However, you don’t get a say in where your money is used, you simply get a low level of interest.

P2P lending takes out the need for a financial institute. Borrowers and lenders come together via a platform facilitated by an alternative finance provider. This cuts out the middle man and provides lenders with direct access to higher rates of interest.

The benefits of P2P

Peer-to-peer lending is a high-income asset for an investment portfolio. Whilst access to higher returns is understandably appealing to investors there are also other advantages to P2P:

  • Investors can choose freely where their money is lent. Whether an individual is interested in supporting start-ups or residential property building, there will be a platform to help invest in that specific asset.
  • With P2P platforms investors can spread their money across multiple loans. This means risk can be tailored to the individual.
  • Interest accrued on an investment is now included in the Personal Savings Allowance. Basic rate taxpayers can earn up to £1,000 savings income tax free, whereas higher rate taxpayers can earn up to £500.
  • Investors can have, in many cases, access to their money at short notice.
  • Most platforms offer a user-friendly only application process that can be approved within minutes.

How risky is P2P lending?

All investments come with a degree of risk. There is always a chance that a borrower might default on their loan. However, different opportunities present different levels of risk and individuals can invest their money in a way which suits a level of risk they are comfortable with.

As previously mentioned, P2P platforms allow investors to spread money across multiple loans. Therefore, spreading £5,000 across 100 investments would result in a loss of £50 if a borrower defaulted. This would be considered less risky than 10 investments from the £5,000, as this could mean losing £500.

In a nutshell, the higher the estimated return, the higher the risk could be. Investors should be aware of their risk appetite and ensure their portfolio reflects their requirements. Peer-to-peer lending is a popular alternative to traditional investment opportunities without being exposed to stock market fluctuations.

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