P2P hits £1bn milestone: what you need to know about the new investment on the block

30th January 2015

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Peer-to-peer (P2P) lending hit £1 billion last year as savings run from low interest rates and investors look for new opportunities: here’s how to invest in P2P sensibly.

 

According to the P2P Financial Association, the P2P lending industry loaned more than £1.2 billion last year, taking the total loaned to more than £2.1 billion – doubling in size since the end of 2013.

 

The number of lenders has also increased by a third in this time and the number of borrowers is up by almost 90%.

 

Christine Farnish, chair of P2PFA, said: ‘These figures demonstrate the growing impact P2P lending is having on the market. Lasy year showed continued and solid growth in the consumer market and a significant increase in lending flow to businesses. Invoice finance and P2P finance within the property market are also growing.’

 

She predicted that 2015 would be ‘another important year’ for P2P.

 

‘The government has agreed that P2P lending should become part of the ISA tax wrapper, a decision we warmly welcome. Our strong view is that government should establish a new ‘lending ISA’ category to enable consumers to understand the difference between P2P lending, cash savings and stock and shares investments,’ she said.

 

Danny Cox, head of financial planning at Hargreaves Lansdown, said the P2P market was still relatively small.

 

‘P2P lending is in a rapid growth phase driven in large part by the derisory rates of interest available on cash. P2P lending is still a relatively immature market but gaining scale and hitting the £1 billion lent is an important milestone. But it’s still a relatively small market and to put this into perspective, [fund manager Neil] Woodford raised £1.6 billion for his new fund launch in one month last year,’ he said.

 

Cox added that while a new ISA may not be a ‘perfect solution’ it ‘makes a lot of sense given the complications of liquidity and the lack of secondary market’.

 

‘Investors are heavily reliant on the credit checks and risk assessments performed by P2P firms and must understand the risks that borrowers may not pay back all of the interest or the capital,’ he said.

 

Cox set out five top tips for P2P investing:

 

  1. Use a tried and trusted P2P provider – choose a firm which is a member of the P2PFA
  2. Understand the risks, particularly how and when you can get access to your investment – P2P is an investment, not a savings account
  3. In general, the higher the headline rate of return, the more risk you are taking- P2P lending to businesses is more risky than lending to individuals
  4. P2P rarely offers immediate access to your money- don’t invest cash you might need back quickly
  5. Diversify by spreading you investments – some of the P2P firms do this automatically – don’t commit more than 5-10% of your portfolio to P2P overall.

The risks

 

There are also a number of risks to P2P investing that potential investors should be aware of. The first is the volumes of lenders to borrowers.

 

Cox said: ‘Finding lenders is easier than finding good borrowers – the ideal borrower is a home owner looking to fund a new kitchen or car. P2P firms have the tricky task of matching the numbers of lenders with borrowers; a huge influx of ISA money could cause them a problem with the risk of a lowering of lending standards.’

 

He also flagged the risk of interest rate rises. Although this should not be a problem for firms lending conservatively and existing loans should be unaffected, new borrowing would become more expensive.

 

‘Most of the repayment of a loan is capital, not interest so in affordability terms a rate rise has little impact on the affordability of the average loan of a few thousand pounds,’ said Cox. ‘Higher interest rates which impact on a borrower’s other debts could be a factor and this is where the credit scoring process is so important.’

 

There is also the risk of defaults if individual borrowers or businesses cannot keep up the interest or capital repayments of a loan.

 

‘Default rates are currently very low: for example, no-one has ever lost capital through a Zopa loan,’ said Cox. ‘However, most P2P lenders have yet to go through a full ‘normal’ interest rate cycle and recession.’

 

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