What are the advantages and disadvantages of peer-to-peer lending?

The major advantage of peer-to-peer (P2P) lending is the inflation-beating, high target returns on offer to investors who are willing - and able - to take the associated risks. Target rates are often upwards of 6%, which is generally higher than other, more traditional methods of investment. 

 

With these higher potential returns does come higher risks though. P2P lending is not protected by the Financial Services Compensation Scheme (FSCS) should your P2P platform go bust, and there is a risk of borrower default. 

However, some P2P loans - including property and business - are secured. This means your investment is secured against an asset such as land or properties if you’ve invested in a property loan, or a company’s assets if you’ve invested into a business loan. Secured loans give the investor an extra peace of mind, but it’s important to remember that they don’t rid the investment of risk completely - your capital is still at risk, and returns are not guaranteed. 

Many P2P platforms will also give investors the opportunity to spread their funds across multiple loans and borrowers, helping to manage risk exposure through all-important diversification. 

P2P lending is a form of alternative investment, and it doesn’t correlate with the public markets, meaning less volatility. 

Though money made from P2P lending is usually taxable as income, investors can hold their P2P loans in an Innovative Finance ISA (IFISA) which benefits from the ISA tax wrapper - making all returns completely tax free.  

 


 

MAVEN 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.