June 16, 2024
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Advantages and Disadvantages of Peer to Peer Lending

Peer to Peer Lending is the fastest-growing investment channel in the UK. Hundreds and thousands of people use peer to peer platforms to lend money every year to receive high returns on investment. No matter, you are investing in Peer to Peer lending for the first time or increasing your existing investment, it is vital to know the advantages and disadvantages of doing so. We are describing the pros and cons of peer lending in this article so that you can understand P2P lending in a better way.

Advantages of P2P Lending

Interest Rate

The biggest advantage of P2P lending that attracts investors is the high-interest rate. The interest rate offered by traditional savings accounts is very low that is why most people think to invest in P2P loans to make more out of their money.

Variety

P2P loans are used for different purposes. It means as an investor you have a wide array of choices when it comes to lending your money. Some most common uses include funding small businesses or housing development projects.

Diversification

Most P2P platforms offer automated diversification to spread your money across multiple opportunities. It helps you to mitigate the risks as you are not investing all your money into one loan.

Ease of Use

P2p platforms tend to be online all the process from making an account to receiving repayments is completed online which is why most investors find it easy as compared to other investments.

Secondary Market

Many P2P platforms have a secondary market that helps you exit your investment early if you want. Through the secondary market, you can sell your loans to other investors.

Tax-Free Profits with IFSA

One type of Peer to Peer lending is Innovative Finance ISA. That facilitates the lending and borrowing process on the online platform. With it you can offer a loan to the borrower at a specific interest rate. You can make big gains but there are associated risks attached with that. However, if you want to withdraw all your capital from the portal, the providers will be required to sell your loans to plenty of investors and you have to pay charges for that as well. The best thing about the IFSA is that you can earn high profits without paying any taxes. Since there are no banks involved.

Disadvantages of P2P Lending

Risk of Capital Loss

The money you invest in P2P lending is not covered by the Financial Services Compensation Scheme. It means you can lose the full amount you put in. However, platforms take steps to make sure that such things do not happen but there is no guarantee.

Cash May Not Be Lent Immediately

One of the drawbacks of P2P lending is that if you want to lend cash immediately you can not earn the desired interest rate. Thus, in case your money is taking more time to be lent, then the effect on your return will be minimum.

Platform variation

The term Peer Peer Lending covers a wide range of platforms, security types, and loans. The due diligence will vary between them and each opportunity. Thus, it is important to consider all the details before you make an investment decision.

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