A second peer-to-peer lender has collapsed, underlining the importance of not just chasing high rates.
Peer-to-peer (P2P) lending offers inflation-beating rates of return by letting individuals lend directly to consumers or businesses.
Investors can be lured by high rates, often in double digits, which are offered in return for often backing firms who may have been rejected by banks or are too small or don’t have a long enough track record for mainstream lenders.
All P2P lending platforms are regulated but there is no Financial Services Compensation Scheme Protection, another reason that rates can be high.
P2P lending is an investment rather than a savings-type account and there is a risk of losing money if borrowers default, making it crucial to diversify.
But there is also a risk of platforms themselves collapsing.
The latest, FundingSecure – which provided loans secured on personal assets – has gone into administration and there is no guarantee how much investors will get back.
It follows the closure of P2P property lending platform Lendy earlier this year.
P2P lending is still a relatively new and niche sector and despite having its own ISA product, called an Innovative Finance ISA, these high-profile cases show it is important to know the risks and only invest in what you can understand.
There are lots of different types of P2P lenders too, with different business models and approaches to underwriting.
Under new P2P regulations being introduced in December, all platforms will need to get users to complete appropriateness tests and will be restricted to marketing to sophisticated or high net worth investors or those only investing 10 per cent of their assets.
There will also be more transparency on performance and defaults
As with any type of investing, you also have to be prepared that you could still make a loss.
- The value of an investment and any income from it can fall as well as rise and you may not get back the original amount invested.
- Past performance is not a reliable indicator of future performance and should not be relied upon.