If you have been careful with your money by putting a little aside every month, the last few years have probably been very hard on your savings. Interest rates have been at record lows for several years now, which means your nest-egg could have diminished in real terms. However, you can earn a far healthier rate of interest by lending your money via a peer-to-peer lending platform rather than saving via a traditional savings account.
Peer-to-Peer Lending Explained
Peer-to-peer lending platforms match savers looking for a good returns on their investment with borrowers looking for a low cost loan. This relationship has been traditionally one with banks and large financial institutions, but the low savings rates and limited credit being offered by banks has led to both borrowers and savers searching for a better deal. As a saver, you can earn a rate of interest several times higher than that being offered by traditional savings accounts – making your capital work far harder for you.
Choose a Platform with Clearly Defined Returns
New FCA regulations demand that peer-to-peer platforms must be transparent about their charges and returns on investment. Your chosen platform should communicate its annualised interest rates after fees – which will often increase commensurately with the term of the loan you are providing.
Does the Platform Offer an Auto-Lend Facility?
Although you may want to invest several thousand pounds through a peer-to-peer lending platform, your cash will be dispersed in relatively small amounts to several different borrowers – spreading the risk of lending. When repayments are received from borrowers, this cash will need to be re-lent in order to achieve the best returns possible – and keep your capital working continuously. An auto-lend facility will ensure this money is re-lent as soon as possible, making your money work for you.
Is There a Quick Withdrawal Option?
Your financial circumstances could change with little or no warning, and that may make it necessary to withdraw from your loan agreements before the end of the agreed term. Provided another lender can be found, a quick withdrawal facility will help you to liquidate your investment quickly and with the minimum of fuss.
Is Your Money Protected?
There are inevitable elements of risk associated with lending money, but some platforms will offer a range of safeguards to minimise those risks. For example, does your chosen platform have a stringent system of underwriting in place? This should include:
• A full credit check for all borrowers
• A complete affordability check
• Identity verification
• A fraud check against the CIFAS register
It is important – and now part of the FCA regulatory rules – that your capital is held separately from the operational funds of the peer-to-peer platform. You should check that your chosen service ring-fences your cash in a not-for-profit trust, as this will safeguard it should the peer-to-peer platform go bust.
There should also be a reserve fund in place – which will protect you from instances of fraud and borrower default. One of the major new peer-to-peer lending platforms, Lending Works, also has insurance against major economic events that are beyond your control. This will ensure your capital is protected in the event of financial crashes and bankruptcies, even as default rates inevitably rise.
A peer-to-peer platform should always put you in total control of your own cash. You should have the ultimate say on who your money goes to and for how long. By doing some research and checking the credentials of your chosen platform, you can start investing with confidence for a more lucrative future.