Peer-to-peer (P2P) lenders have been offeringsavers a superior return to cash for over a decade without fullybreaking into the mainstream.
Theyhave loaned around 2bn in the last 12 months, but this nevertheless remainsa drop in the vast ocean of UK savings. Arguably, market leadersZopa and Ratesetterdeserve better, given that they offer tempting interestrates of up to 5%.
Meet Your Peers
Some people still struggle to grasp the concept, but its fairlysimple. These social lenders raise money from savers and lend it to carefully vetted individual or business borrowers. By cutting out the middleman greedybanks both partiesget a better deal.
Peer-to-peer lendingislikely to get a majorboost from next April, when you can take yourreturns tax free via Chancellor George Osbornes proposed Innovative Finance ISA. The publicity should boost the profile of P2P lending and more than 400,000 people are expected to give it a go,according to research from Yorkshire Building Society.
P2P lending is certainly worth considering. Ratesetter currently offers a five-year return of around 5.5% before tax, assuming you re-invest your interest. The new breed of excitable crowdfunding platforms are chancier,talking up the prospects ofdouble-digit returns.
Zopa and Ratesetter are at thelower-risk end of the spectrum, but still risky. Your money has zeroprotection under theFinancial Services Compensation Scheme (FSCS), which safeguardsthe first 75,000 heldina bank or building society savings account.Zopa and RateSetter arebuilding up large contingency pots to protect their customers, whohavent suffered any losses yet. But they arent for widows and orphans.
Fear Of Crowds
Crowdfunding involvesasking a large number of people to each invest a relatively small amount of money in a spread of start-up businesses, which could be anything from craft ale to childrens clothing to green energy or a myriad new technologies. Notable platforms include Crowdcube, Funding Tree, Property Crowd and Seedrs.
Given that half of UK start-ups fail within five years, the risks are clearly high, and you shouldonly invest money you can afford to lose. Propertyinvestment schemes from P2P lenders such as Lindsay and Wellesley may be a little lower risk.
So far P2P lending has largely avoided any whiff of scandal. Established playersZopa,Ratesetter, Funding Circle, Lending Works and Wellesley areworking hard to keep the sector respectable. They know it will only take a couple of crowdfunding collapses to bring P2P lendinginto disrepute.
P2P lending does have a place in your portfolio, but only if you understand the risks, and how they vary according tothe site. One attraction is that you can start small some sites let you savefrom as little as 10 or 100 andbuild up your stake as you get the hang of it.
Dont succumb to peer pressure next April, as there are still more potentially rewarding options out there.A wise investor will spread their money between cash, bonds, P2P lending and property, and alsobuild a portfolio of individual company shares to tap in the unbeatable long-term returns you can get by investing in the stock market.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.