Peer-to-peer lending has become an area of interest for investors who want to earn high returns on investment. It matches investors with the potential borrowers without the involvement of any bank or financial institution. It allows easy borrowing, and investors can get healthy returns. Young investors in the UK are not investing in stocks or savings accounts because p2p lending offers a better risk/reward ratio. In p2p lending, people invest in loans such as unsecured personal loans or secured business or bridging loan and earn 7, 9 or sometimes 11% average annual returns. If you are thinking of investing in peer to peer lending, it is essential to understand this investment first. Here’s what to consider:
All P2p Platforms Are Not the Same
There are hundreds of p2p platforms in the UK connecting borrowers to lenders. It is important to research each platform you are considering investing through. Check the track record of the platform to find the number of defaults. You can also read online customer reviews to check the transparency of a platform. Always choose an experienced and well-reputed platform to avoid any inconvenience in future.
High Interest Means High Risk
When you make an account on a platform as an investor and want to start investing, you will be taken to a lending portal. In that portal, there are a number of loans that need funding. Each loan that is presented in the portal has different terms, for example, the interest rate and duration of the loan. The borrowers with low credit scores are offered high-interest rates. It means the loans with high-interest rates carry more risks because the borrowers with poor credit scores carry more risk of default.
You May Lose Money
Peer to peer lending, like all other investments, has some risks. With the opportunity of making money, there is also a risk of losing it. Do not get caught in the hype of p2p lending, and keep in mind the risks associated with it. Your investment in p2p loans is not secured by the Financial Services Compensation Scheme (FSCS), and if a borrower defaults, you may lose all your investment. Therefore, always invest smartly according to your risk appetite.
There May Be Income Requirement To Lend
Many people flock towards investing in p2p lending because they think that it could be fun to invest their pocket change and get an interest rate. Unfortunately, there are some barriers to lend through p2p platforms. According to law, investors must meet certain income requirements, and these requirements may vary from platform to platform. So, if you are interested in investing in p2p loans, you must meet the income requirement.
Fees Are Possibility
Peer to peer platforms earn by providing you with the services. These platforms charge different types of fees from borrowers and investors, such as administration fees, arrangement fees, early or late repayment fees etc. Some platforms share interest payments that borrowers earn from their loans. It is better to look through the fees schedule of a platform before making a final decision.
No matter which p2p loan you are investing in, be it a personal loan, business or bridging loan, you must shop around and choose a peer to peer lending platform that offers you competitive interest rates and follows best lending practices.