Finance July 17, 2020 Last updated July 17th, 2020 96 Reads share

Peer-To-Peer Lending vs. Traditional Savings

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The peer to peer industry is going strong as it has reached nearly £11 billion in the UK. With a lot of people looking for alternatives to make the most of their money and preferring p2p lending, we are going to compare the p2p market with other mainstream investment alternatives.

Why Should You Choose Peer to Peer Lending?

Volatility

Peer to peer platform is used mostly by small business owners, customers, and people wanting to raise their property holding. Therefore, the lending is not tied directly to the stock market and still faces volatility like any other lending method. Investors can select the period over which they can lend money, this prevents overreactions to a fluctuating market, and it contributes to a stable investment. Real estate and stocks both fluctuate with the market’s highs and lows. While bonds are less inconsistent, they usually offer the lowest return.

Returns

P2p lending takes benefit of high street investors’ reduction in readiness to invest and fill the gap by matching lenders with borrowers. By eliminating the middleman, the bank, loans are sorted out faster. The average savings account with secure access can offer only 0.52% yearly. On the contrary, peer to peer lending allows investors to select the projects they would like to lend to, this way, investors can make a well-informed decision and choose options to fulfill their needs and interests. Several investors like the feeling that their money is helping small companies, who otherwise may not be able to access funding.

Some p2p platforms offer investment packages, meaning that the investor doesn’t need to be involved in choosing borrowers. Usually, this can spread the investment over different borrowing opportunities while reducing risk. There can be a high return when lenders select their range of investments. P2p lenders have also started offing Innovative Finance ISA, as part of their investment options. With IFISA, investors can invest up to £20,000 per year, with tax-free interest for life.

Level of Investment and Access to Money

Most p2p lenders have a minimum lending level of around £100. This allows new lenders to try p2p services without committing large sums of money. While stocks and shares offer a low minimum investment, the dealing cost usually makes it less profitable to start small. Cash and bonds savings account allow low start as well but also have lower returns. Access to money in savings accounts and bonds is restricted with a loss if early withdrawal is made. There is real estate investment that ties up your money for the long-term, and it can be hard to exit if the market is depressed.

With peer to peer investment, there is an option to select the period for which you which to invest your money. If a loan gets repaid early, then you will get your money at the same time. However, if at any time you wish to withdraw your funds early, then it can be done if another investor is available to take over the loan part. In short, your money will be tied up until a new investor is available.

Security

P2P platforms perform background and credit checks for potential borrowers; this way, they rule out people who don’t meet the standard requirement and grading borrowers who are picked based on risk level. Investors can also select the kind of borrowers they prefer to lend to, as mentioned before, the returns may be higher but with increased risk.

In case a borrower defaults on repayment of their loan, then rest assured that the p2p platform will track them for complete payment. A few peer to peer platforms offer secured loans which are backed by property, and they also may have a backup set up to cover all or some of the default. Still, P2P investment is not covered by FSCS. If there is a case of default, you may lose some or all of your investment.

Contrarily, cash and bonds are backed by FSCS to amount to £85,000 and offer high security. A good alternative for shares are Bonds that can be paid out before shares in case of bankruptcy. The stocks & shares is a fluctuating market, and you can lose your invested money. There is a high risk if you invest in only one business.

The good thing about P2P lending is that you can diversify and lower the risk of your investment by investing in different projects. The respected peer to peer lenders also has a wind-down policy to prevent turmoil if the platform ceases to trade.

Regulation

In p2p platforms, the regulations for investments are established. The new p2p lending industry is under the supervision of FCA (Financial Conduct Authority). Because of peer to peer sector’s continuous growth, the FCA set new rules in 2019. The FCA aims to make sure that everyone understands the difference between p2p lending and other conventional savings accounts.

In a Nutshell

P2P investment offers lenders an opportunity to get better interest rates and investment opportunities to make a diverse portfolio. However, like other investment methods, there is risk involved, and you may lose part of or all of your investment in p2p lending, but you also have the option of spreading the risk.

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Sana Tahir

Sana Tahir

As an expert in VoIP phone technology and peer to peer lending, I write from experience. My content provides the helpful tips and suggestions to businesses of all types and sizes. With my content owners can learn to improve their business communication and getting finance sorted out with peer to peer lending.

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