While you’re looking for a peer to peer funding platform to use, there are plenty of things to consider. Bear in mind the following when making your decision:
- Focus on the platform, rather than the loan. P2P lending is one of the less time-consuming investment options. If you’re looking for good returns for minimum effort, opt for platforms that take care of your investments behind the scenes.
- Diversify your investment. Just as putting all your eggs in one basket leaves you vulnerable to a defaulting borrower, the same goes for the number of platforms in which you invest. If you split your savings across several platforms, you reduce your risk if one of the platforms goes bust. That said, it can be hard to keep track of your funds when they’re spread across too many platforms, so investors recommend sticking to a maximum of five.
- Look for an easy exit. Some platforms make it easy for lenders to withdraw their money, taking care of the rest. They’ll reallocate your loans to other lenders behind the scenes, meaning you get your money back quickly without any hassle.
How is P2P interest taxed?
For tax purposes, HMRC views most money earned through peer to peer lending as income, which is taxable. For most lenders, they won’t pay any tax due to the personal savings allowance, which allows basic rate (20% in 2020) taxpayers to earn up to ?1,000 of tax-free interest.
Higher rate taxpayers (40% in 2020) have access to the same scheme but have a lower tax-free limit of ?500. Any interest earned above these thresholds is liable to tax, which you must pay at your highest marginal rate of tax. Additional rate taxpayers are not eligible for a personal savings allowance, so anybody who earns more than ?150,000 per year must pay tax on all their savings.
Investors can now choose to have their P2P loans held in ISA, thanks to a new type of ISA called the In especially for peer to peer lending. ISAs are Individual Savings Accounts which allow the holder to save, tax-free.
This is an attractive option for investors, encouraging them to put their savings in peer to peer lending sites and watch their money grow. Often with the IFISA, you can receive interest from your loaned funds through P2P without paying tax up to the annual limit of ?20,000 (2020).
What if my P2P finance platform goes bust?
As with any financial service, there is always the risk that the service itself will go bust. Several P2P companies have gone out of business, which poses a risk for their lenders. Any money that you lend on a P2P website is not covered by the Financial Services Compensation Scheme (FSCS), which means that you cannot get help recuperating money if the platform goes out of business. This lack of safety net makes P2P lending a riskier venture than investing with banks and buildings societies, which are covered by the FSCS.
That said, many P2P websites have contingency funds or provision funds, which can pay out if a borrower defaults on their loan. For this reason, it’s essential only to use P2P websites which are regulated by the Financial Conduct Authoritypanies controlled in this way must keep lenders’ money in separate accounts to their own, which reduces the risk for the lender. These accounts are usually ringfenced and held with a different bank, which will be protected under the FSCS.
How can lenders maximise P2P lending returns?
- Many sites have also introduced their own contingency schemes which assumes the risk of a defaulting borrower by guaranteeing to return an investor’s full savings if a borrower doesn’t pay up. Sites create this fund by charging a credit rate fee to each borrower between 0.5% to 3% of the loan, which contributes to the provision fund. These schemes encourage investors to use peer to peer lending by reducing their risk of losing their funds.