Peer 2 Peer investments are facing turbulent times, but there are still platforms welcoming ‘casual’ investment – funds made available by individuals rather than by institutions.
You’ve probably heard of P2P lending, but you might not have considered it as a key part of your portfolio.
But there are still good reasons to give P2P another look, and even if you are new to this form of investment – and therefore subject to the recently introduced limits on how much of your portfolio can be exposed to P2P – you can still put up to 10% of your funds into it.
Seek expert advice from an investment advisor and you can potentially avoid that cap anyway, to allow you to put even more of your portfolio into P2P loans.
The institutional side of P2P investment has become dominant, accounting for 97% or more of the funds invested through some P2P platforms, and if the institutions are investing, it’s usually a sure sign of profits to be made.
How P2P investment works
You can think of peer-to-peer lending as a loan you offer to someone who needs it, on the promise that they will pay you back with interest.
In principle it really is that simple – P2P loans are essentially like any personal loan from years gone by.
P2P investment platforms provide the technology for lenders and borrowers to match with one another, and for you to manage multiple loans and investments through a single account.
The platform may also offer features like credit ratings and risk assessments of loan applicants, facilitating the repayments and calculating interest rates that fairly reflect the level of risk.
Some also offer a provision fund that aims to compensate investors if the borrower fails to repay the loan; however, it is worth checking how much financial risk you are taking on each time you offer a P2P loan through an online platform.
Long-term P2P investors are usually aware of the inevitability of individual losses, but manage the level of risk in their portfolio carefully so that their profits more than match any losses made due to isolated loan defaults.
Is Peer 2 Peer investing right for me?
Only you can decide whether P2P lending is something you want to invest in.
There are platforms dedicated to specific types of lending, for example, commercial and buy-to-let mortgage funding, so if you consider yourself primarily a property investor, these could be an interesting way to expand your portfolio.
Consumer lending is a huge market and one that the banks have benefited from for generations. Peer-to-peer lending is a way for individuals to access that market on the profitable side, so it’s well worth a second look.
Interest rates can be impressive compared with other forms of investing too, especially in subdued markets or a flat economic cycle; again, if the property market is flat, putting funds into P2P mortgage lending could help to increase activity and support your other investments, albeit by a relatively small individual contribution.
Some platforms also allow you to set the interest rate you want to earn. Generally speaking, the borrower will be matched with the lowest interest rate offered to them, but if the risk-reward calculations line up, you could still get the kind of repayments you want, rather than having to take whatever’s on offer.
And some investors welcome the self-managed nature of P2P investing. You get access to an online platform where you can place funds 24/7, with clear upfront fees so you always know how the costs will erode your returns.
How to grow a Peer-to-Peer portfolio
If you plan to invest in Peer-to-Peer lending over the long term, think about how you want your portfolio to grow.
Some platforms offer a reinvestment feature so that as you receive repayments from previous loans, these can be made available to new borrowers who fall within your acceptable risk profile.
This is essentially like reinvesting the dividends from a conventional portfolio, so if you’re looking to build capital growth rather than to take an immediate income from your investments, it’s a hands-free way to do that via P2P.
With several major P2P lending platforms to choose from, you’re not limited to just one, so you have a decision to make:
- Put all your funds into one P2P lending account to maximise your access to high-interest opportunities on that platform, OR
- Spread your finances across multiple P2P platforms to access different markets and hedge against the failure of any one platform.
We’ve seen several high-profile platforms withdraw from the casual side of the market in recent months, citing the dominance of the institutional side as the main source of finance.
These withdrawals have been orderly – in some cases allowing existing casual investors to continue receiving interest payments on existing loans, and just closing the platform to new lending.
But you might still prefer to opt for a spread across different platforms, not only to mitigate risk but also to invest in property-focused and general lending platforms alike.
Growing gains and confidence
The new regulatory regime for P2P lending in the UK means that if you are an amateur investor who is a relative newcomer, you’re likely to be limited to putting no more than 10% of your money into P2P platforms.
Over time though, your confidence should grow and you will be able to legitimately argue that you have the necessary experience for this protective cap to no longer apply.
You should also be able to skirt it, if you wish, by consulting an investment advisor who can confirm that you are making an informed choice about investing in P2P.
By reinvesting the interest payments you receive, you can focus on long-term compound growth, which is generally the best way to make the biggest gains from any investment portfolio.
At the same time, remember your exposure to risk on each individual loan, so that if multiple borrowers on your account default on their repayments, you are not left in financial difficulty yourself.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.