Peer-to-Peer lending has become an established route to secure finance for small to medium size enterprises (SME’s), and already this market sector has witnessed over £5 billion in investment. If the term “Peer-to-Peer”, and even the concept has eluded your attention, then read on and learn a little more about this new phenomenon.
What exactly is Peer-to-Peer lending?
Traditionally offering and securing investment had been the domain of the banking system, with both investors and borrowers utilising banks as a means to obtain their goal. Peer-to-Peer lending is now a well-established process of lending money to individuals and businesses alike. The practice involves matching lenders (investors) directly to borrowers usually through online portals.
Through matching up it is common for lenders (investors) to achieve better rates of return, and in the same way, borrowers can benefit from more flexibility and even more competitively priced loans. Since the banking crisis of 2008 many SME’s have found that the traditional way of securing investment has become much more difficult, leaving an opportunity in the marketplace that Peer-to-Peer lending seems to address by providing access to funding and better rates of return.
One of the major pre-requisites for Peer-to-Peer companies is that they almost entirely operate on the web and in that respect are able to provide their services far more cost effectively that the traditional hight street financial institution. The operating efficiency for these online companies can then be translated by offering more attractive financial terms to lenders and borrowers alike.
An important component of Peer-to-Peer investing is the flexibility, for example, an investor could choose to have their return based on growth and finalise returns on the maturity of the investment period or when the investment reaches a percentage growth point. Alternatively, an investor could choose to have the returns on the investment paid monthly almost as an “income”. For added convenience returns can be paid into a nominated account.
In recent years the consistently low-interest rate has been crippling for those with savings and if you are one of the many that fall into this category considering doing something novel with your money could bring returns.
Peer-to-Peer compared to traditional investment
It is simple to identify some of the benefits of Peer-to-Peer investments with those of deposit based investments, however, when comparing to investments in the stock market, shares, or equities it can be more difficult. In an ideal world, share investment can provide two potential returns, one as the capital value of the increase and two, an increased income provided by the dividends paid.
Of course, all types of investment are affected by market dynamics; it is interesting to be aware that under the changes to Personal Saving Allowance (PSA) rules, dividend income from shares do not fall within the annual tax-free allowance and therefore do not get the favourable tax treatment that income from investments such as Peer-to-Peer loans enjoy.
Recent experience suggests that Peer-to-Peer lending is a win-win process for investors and borrowers, and the indications are that Peer-to-Peer lending is here to stay, is now an established presence in the financial marketplace, and will continue to grow.