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Guide to Peer to Peer lending

What is peer to peer lending?

Peer to peer (P2P) is where you lend money to companies, property developers etc and they pay you back the loan with interest. It takes away a bank from being a middle man and makes you the bank. It is often agreed through an intermediary know as a P2P platform. 

What is the risk?
P2P is higher risk than a normal savings account and is not covered by the FCSC scheme (which protects up to £75,000 per person/per financial institution). Though there is regulation through the FCA who appear to be particularly stringent with their accreditation. As of 2017 accredited firms will need to have at least £50,000 of reserve capital (larger amounts for bigger companies). The loans agreement is technically between you (the lender ) and the borrower, so if the P2P company goes bust you could pursue the borrower for the money owed. However, to date there have been no horror stories to guide what to do in those circumstances. 

What are the pros?

The considerably higher interest rates may make this a suitable investment option for you. It is the potential for return that has meant that the P2P market has exploded following the post 2008 interest stagnation. Though it is important to remember that you money may not be loaned immediately and as such won't necessarily be earning interest straight away. 
Another benefit of P2P is that it can now be tax efficient. Some providers recently got the go ahead to provide an ISA service (similar in style to a cash ISA). 

Top P2P Platforms

1. Wellesley

This platform lends your money out to property investors and therefore your money is secured against real estate lowering the risk. Their Auto-matching tool means your money is kept well diversified and their provision fund is there to protect you in the case of any loses. They offer an ISA  with up to 5.55% interest. There normal savings accounts provide interest rates ranging from 3.55% to 6.32%. For easier access there is a 30-day access fund which offers the lowest interest rate available. 

2. Zopa

Zopa is the longest running P2P platform having lend out over £1bn to individuals. The rate averages are 3.8% for 3 years and 5% for five years. However, you will be charged a 1% fee. Your money is spread across a number of borrowers with a variety of risks. Where the borrower is in 4 or more months arrears this is usually covered by their safeguard fund. Money can be withdrawn in 3-5 days. 

3. Funding circle

Offers some of the highest P2P returns but also high risk. Involves loaning to businesses. INterest rate averages at a MASSIVE 7.1% (though there is a 1% fee and 0.25% if you sell loan on). Using auto bid helps to simplify the process and ensure diversification with your investment. 

Have you tried investing in P2P? How have you experiences been?

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