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Peer-to-peer lending enables you to lend to individuals or small businesses - cutting out the need for banks to be involved. You could earn higher returns than from other types of investment, but there are risks.
You can invest in some P2P products through an ISA – using your £20,000 annual ISA allowance. Your £20k ISA allowance can be spread across different types of ISA – such as cash, stocks and shares and an IFISA.
An ISA that contains P2P loans is known as an innovative finance ISA – IFISA. ISA tax rules apply. P2P products are not covered by the Financial Services Compensation Scheme – including those in an IFISA.
Potential to make greater returns than other types of investment
Loans can be secured, so you have some recourse should a borrower default
Some P2P platforms have provision funds should borrowers run into trouble
Peer-to-peer lending is an investment and all your initial capital is at risk
There may be charges if you need to get your money back quickly
Returns can be lower than expected if the loan is paid back early
Peer-to-peer lending can offer some eye-catching returns, but it is not without risk and unlike high street savings accounts your money is not protected by the Government if anything goes wrong. This doesn’t mean you should rule out P2P as an investment option though. Make sure you research the platform thoroughly before you lend and be as confident as you can that its provision fund is robust enough to cover any defaults that might arise."
If the peer-to-peer lending platform goes best it doesn’t automatically mean you’ll lose your investment. The loan is between you and the borrower, so whether an individual or firm, they will still owe you the debt. As part of the platform’s wind-down the loans are likely to be picked up by a third-party (potentially another P2P platform) who would be in a position to give you recourse. However, this may not always run smoothly, and you may get back less than you had loaned out. P2P accounts - including loans held in an Innovative ISA - are not covered under the Financial Services Compensation Scheme.
While both peer-to-peer lending and crowdfunding involve you giving money to an individual or company, the difference is that peer-to-peer lending is a loan that should be repaid. Crowdfunding does not usually need to be paid back.
It’s often wise to spread your investments because this helps spread the risk. Often peer-to-peer lending is seen as being at the higher end of the risk spectrum. But this could also lead to potentially much higher rewards. For this reason some investors use it as part of their overall investment portfolio.
You may have to pay tax on your returns, but some peer-to-peer investments can now be included tax-free within an ISA. This type of ISA is known as an innovative finance ISA and you can invest up to £20,000 in ISAs, either in stocks and shares, cash, or peer-to-peer loans, or you can invest in a combination of these. ISA tax rules apply.
Auto investing is where you invest through a digital platform that uses algorithms and variables such as age, income, goals, and risk tolerance to pick a mixture of suitable investments for you. Money is often invested at regular intervals in a pre-set strategy.
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