With rates of return on cash still at a low point and with little prospect of an immediate interest rate rise clients will continue to be attracted to possible alternative options offering a seemingly more compelling rate of return. This can sometimes lead to rather interesting telephone conversations:
I’m going to invest £30,000 into Peer to Peer lending. I’ve heard it’s as safe as cash and my current rate of interest from the bank is hopeless!
Cash returns have been low for a number of years now but the account value is normally available on demand. With Peer to Peer lending, the rates can look attractive, in excess of 6% in cases, but what are you actually investing in?
The primary risk is that you may not get back some or all the amount you ‘invest’; your capital is not guaranteed. There is also no guarantee as to the returns you will receive on your investment. lso worth noting is that rarely is interest is paid on your money whilst it is waiting to be lent out; on smaller sums this is not necessarily an issue but it could be for larger sums.
You are not covered by the Financial Services Compensation Scheme unless you received advice in relation to the investment from a regulated adviser, post April 2016; then up to £50,000.
If a Peer to Peer lending company fails financially, as the arrangement is between the lender (you) and the end borrower, you would be left to recover your investment directly with the end borrower.
Although Peer to Peer lending is a growing area it is still a relatively fledgling industry so whilst is may be appropriate for some individuals, for the more risk averse there are alternative lower risk investment options to explore before committing to a Peer to Peer lending arrangement.
To repeat the words of Lord Adair Turner speaking on the Today programme (some 12 months ago) when said he strongly suspects that the losses on Peer to Peer lending which will emerge within the next 5 to 10 years will make “the worst bankers look like absolute lending geniuses.”
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