In the current financial environment, some may think it is a bit of a waste to keep their liquid assets or available cash in low yield savings accounts, CDs, or other similar low-risk instruments. Then again, some may feel that the potential volatility of equity, commodity, and other similar medium- to high-risk products may rank as “throwing good money after bad.”
A possible solution may be available in peer to peer (P2P) lending. Also called “crowdfunding”, these are non-bank platforms where lenders, who can be individuals, corporate entities, or financial institutions, invest directly into a loan to borrowers who may not be able to pass muster for a bank loan (but are still financially viable) or are shopping for more amenable financing terms.
“Diversity is key in any investment portfolio,” advises Richard Cayne of Meyer International. “Today, there are so many different options available to individual investors that it makes sense to investigate as many as possible. Peer to peer lending is an opportunity that is gaining traction in many markets.”
More about P2P lending
Using the term “crowdfunding” may be confusing, as many think of sites like Kickstarter or Indiegogo where investors may be compensated through other ways than cash, such as with products, profit sharing, or equity stakes. Or sometimes, funds are (or are expected to be) donated with no compensation expectations.
P2P lending is all about loaning cash and getting pack back in cash, usually with interest. Although it’s considered direct lending, that’s not quite how it works. You wouldn’t be handing the funds over directly to the borrower. This would be facilitated and overseen by an intermediary service, which, oddly, may be backed by a bank.
But, P2P lending is much more flexible because each loan be funded by a variety of sources. Depending on the platform, you can start investing with as little as US$25 and earn interest of up to around 30% (This may seem high, but remember, they’re not banks. And these rates most likely carry a greater risk of default). Loan terms can be for six months to ten years, and your commitment to these loans vary as well.
In some cases, you are funding an overall basket which is then allocated to loans based on your set criteria. In others, you can “bid” on loans, offering to finance some, or all, of the loan, based your offered interest rate and terms. Some services have rather draconian specifications for transferring or withdrawing funds. And then there are the fees. Those vary as well.
Borrowers depend on the platform, and they tend to vary just as much. They do tend to be smaller, ranging from personal loans (for home improvements or for a large purchase like a holiday or a car) that may not be granted by a bank to small business loans to help start-ups or going concerns stay up and running. Although they may not have the credit score or history that traditional financial institutions require, P2P lending platforms do conduct their own due diligence and make allowance, such as an extremely high interest rate for high risk or accepting high value objects collateral (e.g. jewelry, antiques, vehicles).
Many consider P2P lending as a safer investment than stock markets, but as with any investment, there is a certain level of risk.
Is this a safe investment?
Because there is little to no regulation specific to P2P lending and most don’t qualify for government-backed deposit insurance schemes, you may find yourself in a no man’s land when it comes to legal protections.
Some services do offer their own fund protection, and they all should disclose default rates and credit information to a useful degree. So, you should definitely ask questions (don’t rely just on the P2P lending site’s FAQ). Not to scare you, but China just had a recent P2P lender scandal (http://www.reuters.com/article/china-fraud-ezubao-arrest-idUSKCN0VA1E5), and the US P2P lending behemoth was investigated for dodgy lending practices (https://cfi-blog.org/2016/05/12/the-lending-club-scandal-and-what-it-means-for-marketplace-lending/).
If you still have doubts, then maybe you should give this a miss, or start small and give this investment option a test drive.
You can find out more about UK based P2P lenders at the industry association website (http://p2pfa.info/) or contact Richard Cayne to discuss your options further.