P2P lending: how to choose the right platform for you
If you’re thinking about investing your money through a peer-to-peer (P2P) platform for the first time, it’s essential to research your options thoroughly. No two P2P lending models are exactly alike. It’s worth spending time learning about the benefits and risks associated with each of the lending platforms on your shortlist so that you can make an informed and confident decision.
First, it’s important to understand the concept of P2P lending in general.
What is peer-to-peer lending?
Pure P2P lending is an alternative finance model that acts as a matchmaker between investors and the individuals or companies that are looking to borrow funds. Using advanced technology, P2P lending platforms are able to provide a modern lending model that does away with the need for a bank to act as lender and intermediary.
Positive aspects of this lending approach include its accessibility to everyone, who can invest relatively small amounts and potentially benefit from higher interest rates than they would through easy-access cash savings accounts at retail banks, albeit with a higher degree of risk. The technology that drives online P2P lending can also support a swifter and more efficient investing experience, depending on the platform.
On the downside, however, the consequence of having no intermediary is that should a loan default, it’s your capital that is at risk. The loss is borne by you, as the investor, not by the lending platform.
That said – this is how the pure P2P lending model works. Today, there are new approaches to limiting loan losses, with some innovative new P2P lending models emerging.
Choose a platform that suits your investment style
Any investment involves a level of risk and P2P lending is no exception. While there are too many different approaches to P2P lending to compare every platform in detail in this article, it’s important for you to do your homework in this regard. As an investor, you need to find a P2P lending model that aligns with your unique investment goals and the level of risk you’re willing to tolerate.
Key considerations
- Can you diversify with ease?
Spreading your money across a number of different loans helps you to spread your risk and minimise the impact of any losses. A platform that makes this easy by automating this process – or even part of this process – may be an attractive choice.
- Are you an active or passive investor?
Some investors prefer knowing who they’re lending money to, either because they enjoy seeing how their investment can make a difference, or because they want to personally vet and select loans in an effort to minimise risk and/or maximise return. However, as the word “effort” in the previous sentence suggests, this “active” investment approach can be challenging for investors with large portfolios and little time to spare, or everyday savers who lack the requisite level of financial expertise. In this case, a “passive” lending model, such as one that automatically spreads your investment across the loan portfolio, may be a better choice. Which camp do you belong to? Be sure to choose a platform that offers your preferred investment approach.
- Skin in the game
Is the lending model aligned with your interests, as an investor? Typically, a loan originator that is invested alongside you has a vested interest in the success of your investments.
- Default and recovery process
Should a loan go bad – does the platform have a sound recovery process in place; and is it willing to provide you with information on this process, so that you can make a more informed risk choice?
- What about FCA authorisation?
The UK’s P2P lending industry is regulated by the Financial Conduct Authority (FCA). Being authorised and regulated by the FCA does not guarantee the efficacy of a platforms’ performance or credit risk management policy, but it does mean that the firm is providing financial services legally. It’s therefore essential to check that any P2P platform you use is appropriately authorised to carry out its activities. This way, you’ll avoid the possibility of investing through a platform that does not have permission to carry out regulated activities – as happened in the recent Collateral case.
Ultimately, every P2P lending model is different. Your choice depends on these details.
Introducing Loanpad
Loanpad is a new FCA authorised and regulated P2P lending platform that offers an innovative new platform and lending structure.
Unique lending structure
As a matchmaker platform, Loanpad does not invest its own capital, but rather partners investors with established property lenders (lending partners). Over and above this benefit, the lending partners take at least 25% of each loan on a first-loss basis – putting ‘skin in the game’ and shielding Loanpad investors from initial losses. This structure provides further safety and quality assurance.
Loanpad effectively converts property loans into two risk classes:
- A lower risk senior part for Loanpad investors
- A higher risk/return part retained by lending partners
The lending structure aims to minimise the chances of any loss, as well as the impact should a loss occur. It achieves this by both diversifying investors’ portfolios across the entire performing loanbook, daily (reducing the impact of any losses) and ensuring that the established property lenders hold their tranche on a first loss basis (reducing the chance of any losses).
Unique platform experience
In addition to offering an innovative lending structure not currently available anywhere else (it may soon be copied), Loanpad also offers its users what it terms “the optimal lending experience” by offering two easy-to-use lending accounts.
Both accounts:
- Offer the operational simplicity of typical online current and savings accounts, but with higher returns due to the higher degree of risk
- Pay interest daily
- Diversify all funds daily
- Are ISA eligible – if held within an ISA wrapper, investors can earn the same great rates tax free
Free daily access is available from the Classic account*. The Premium account pays a higher rate of daily interest, but free access requires 60 days’ notice*.
If you are looking to explore P2P lending further and you’re considering Loanpad as an investment option, learn more about our Classic or Premium lending accounts here.
* We do all we can to release your money as soon as you ask for it. But this does depend on funds being available, from time to time there may be a slight delay.
