P2P lending is an investment. This means that your capital is at risk and returns are not guaranteed - as is the case with all investment products.
However, many investors - particularly experienced investors - may be willing to accept the higher risks that accompany P2P lending in search of higher target returns.
The biggest risk that investors face with P2P lending is that the borrower(s) will default on their loan(s). This is true across all underlying assets - business, consumer and property.
For example, businesses in search of P2P loans are typically early-stage start-ups, and with that comes a higher chance of failure than more established businesses. If the business was to fail for any reason, they may not be able to pay back the loan to the lender (investor). On the other hand, if the business grows as expected, the investor could receive attractive, inflation beating returns.
It’s also important to note that the P2P lending market - as well as the IFISA, which many investors may opt to hold their P2P loans in - is not covered by the Financial Services Compensation Scheme (FSCS). This means that if your provider was to go bust, you could lose some or all of your funds.
All P2P lending platforms should have processes in place to help reduce the risk of loan defaults. It’s advisable that, before investing into P2P loans, you thoroughly research your preferred platform. Take into consideration their prospective borrower vetting process, as well as their track record as a provider and their team’s expertise - not just in the P2P market, but in the underlying asset too.
Some P2P investments will be secured against an asset - such as a property, or a business’s assets - adding an additional layer of security and peace of mind for the investor. However, being asset-backed doesn’t free the investment of risk entirely, and in the event of an economic downturn you may not get back the amount invested.
Diversification on the part of the investor is also highly important. All investments carry risk, and to help minimise that risk it’s advisable to spread your investments across multiple different assets and sectors. This is also the case with P2P lending. If your platform allows, you could consider investing your funds across a number of borrowers rather than just one or two.
CARLTON Bonds are an IFISA provider specialising in fixed term property bonds.
Against a backdrop of low interest rates and a volatile stock market, the IFISA can provide an attractive investment opportunity for experienced investors.
With the ability to hold peer-to-peer loans and debt-based securities, IFISA investments have the potential to generate higher rates of return than more traditional investment routes for investors with a greater appetite for risk.
To find out more, download our free IFISA guide.