I'm looking for a good summary of P2P to use for training. Anyone come across a good source?
This is an article from one of our newsletters. The caveat being it is quite old...2015 I think. So you may want to sense check it is still all correct.
Peer-to-peer lending is a growing alternative for cash savings. This practice allows individuals to lend money to unrelated individuals (peers), without going through a traditional financial institution such as a bank or building society. With interest rates currently being offered through traditional savings accounts continuing to remain at historically low levels, peer-to-peer lending has become more attractive in recent times. It has also proved popular with ethically minded savers who have reservations about using banks. The Peer to Peer Finance Association has reported that over £900M was lent through its members during the first three quarters of 2014, almost as much as in the previous three years put together.
How does it work?
The lending takes place through an online peer-to-peer lending company, which matches lenders and borrowers online. Cash is exchanged and all repayment chasing is effected by the peer-to-peer lending company. Cash can be lent to a number of different borrowers, potentially for different term lengths and rates. Borrowers are picked selectively through credit checks and are rated by the lending company accordingly.
Taxation is applied in the same way as a standard bank savings account and interest is therefore payable at 20%/ 40% or 45% depending on your marginal rate of income tax. Interest is not actually paid on your money until the cash has been lent to a suitable borrower. Smaller amounts are usually lent out quite quickly, whilst higher amounts can take a number of weeks to lend. It is therefore recommended to drip-feed higher amounts in.
The market is developing fast, with new lending platforms popping emerging all the time. As this is a new and emerging area and although thus far there seem to be relatively few problems to speak of, it is always worth bearing in mind that there could be potential unknown risks involved. Individuals may be advised to use several different peer-to-peer lenders to diversify the end borrower and platform risk.
What are the Risks?
While it can work well if you are able and willing to lock cash away, it is important you understand the risks of this hybrid form of saving and investing before parting with your cash.
Clearly higher returns, in this case higher levels of interest, can mean higher levels of risk and your capital is not covered by the Financial Services Compensation Scheme (FSCS) in the same way as a conventional bank deposit account. Peer-to-peer lenders are now regulated by the Financial Conduct Authority (FCA), however if the platform goes bust, most loans will continue between you and the recipient. With you the lender taking on the risk of default, the saver carries the risk and this is worth remembering if the economy deteriorates. Tougher economic conditions and an increase in unemployment could lead to a higher rate of defaults. All trade body members are required to have insurance to pay for a third party collection agency. Peer-to-peer lenders use different ways to reduce the risk of an individual saver losing all of their money. This is another reason to consider spreading your money between platforms.
ISAs and Peer to Peer Lending
We will wait to see what the outcome is of the consultation on the prospective use of ISA wrappers for peer to peer lending. The current rates of interest payable will mean that the returns are potentially quite attractive however it is probably likely to be later in the 2015/16 before the first Peer to Peer ISAs actually become available.