Online peer-to-peer lending platforms connect lenders and borrowers, offering benefits to both borrowers and investors such as better loan approval rates and more competitive interest rates than banks.
Financial advisors provide access to loans not otherwise available, like debt consolidation. Like any investment, however, there may be risks involved - but an advisor can help assess your risk tolerance and suggest the most suitable asset allocation strategies.
1. The Basics
Peer-to-peer lending (P2P Lending) is an online platform which connects borrowers and investors. Users submit financial information, receive a risk rating and then select which loans to fund - such as home improvement loans, debt consolidation or major purchases. The loan website handles disbursement of funds and collection of interest payments.
Peer-to-peer lenders offer competitive annual returns by cutting out banks as middlemen, yet face risks that could reduce or eliminate them entirely.
Diversifying your peer-to-peer lending portfolio to reduce risk is recommended to protect the value of your investments and lower overall risk. One effective method for doing this is investing in "notes", rather than individual loans; since notes only cost $25 each, a $5,000 investment can spread across hundreds of loans without increasing risk overall. Another option would be using NSR Invest's services which manage P2P investments for an annual fee - these can provide high returns without increasing overall risk exposure.
2. Risks
Peer-to-peer lending can be risky, like any investment. But most platforms take steps to vet borrowers with excellent credit histories before lending out money; many also allow investors to choose their borrowers or spread their investments across several loans so as to minimize risk.
But if too many of your loans go bad--or if the economy collapses and all investments suffer--then your losses could become substantial. Therefore, it's essential that your portfolio includes other forms of investments as a hedge against any potential peer-to-peer lending losses, while trying to limit peer-to-peer lending itself.
Furthermore, most P2P lending platforms require you to stay with them until the loan has been fully paid back, meaning if a borrower defaults or stops making payments you must wait until its repayment before receiving your money back. This can be frustrating and push people towards more traditional financing solutions.
3. Fees
Peer-to-peer (P2P) lending platforms function similarly to eBay in that they eliminate financial intermediaries between buyers and sellers, connecting lenders directly with borrowers via technology platforms like PeerLending. P2P lending provides increased returns for investors while decreasing borrowing costs for those with poor credit who would have trouble qualifying for traditional loans with higher rates.
Investors on peer-to-peer lending sites select which borrowers they will fund based on factors like purpose, income and credit score - ultimately earning a competitive annual return that may even surpass what can be earned with savings accounts or CDs.
P2P investing may add diversity to your investment portfolio, but it can be risky. Since borrower defaults are commonplace, P2P investments should comprise only a small part of overall allocations. One option would be using NSR Invest's managed peer-to-peer portfolio service for an affordable annual fee, which provides expertise on strategy, diversification and reinvestment services for you.
4. Taxes
Peer-to-peer lending enables individual investors to lend money directly to individuals instead of going through financial institutions as intermediaries, providing loans that might otherwise go unapproved to individuals who need access funding and giving investors another way to earn returns from their cash savings.
While peer-to-peer lending offers numerous tax benefits as an investment vehicle, its tax implications must also be carefully considered. In the UK, peer-to-peer loan interest counts as income subject to taxes. Basic rate taxpayers may claim an annual personal savings allowance of PS1,000 which reduces this impact of this tax burden.
Banks who write off or charge off P2P loans that become irrecoverable can claim income tax relief against other interest income on their self-assessment tax return, with more information provided by HMRC's guidance on Income Tax relief for irrecoverable loans. Peer-to-peer loan interest may also be included as part of an ISA or retirement portfolio investment strategy.
