However, it’s not right for everyone. So, if you’re thinking of giving peer-to-peer lending a go for the first time, we’ve put together a list of some of the top questions you should be asking yourself.
1) Do you need instant access to your money?
There’s plenty of different platforms out there, but even those that don’t require you to lock your money away for a fixed term of investment, generally won’t be able to promise you instant access to your money. Usually, they’ll need to sell your loans first to other investors, or you’ll need to sell your loans on the secondary market if they have one.
Alternatively, if some of the loans have had difficulties being paid back, you might not be able to access this money until they’re back on track – or, if the borrower can’t pay back, until the asset has been sold.
So, while P2P providers that don’t have a fixed-term can offer a relatively flexible investment option, if you think you might need access to all of your funds in an emergency, then peer-to-peer lending isn’t for you.
2) Do you have enough money to invest?
Most experts would advise anyone thinking about investing to always have an emergency fund of cash available in case of any surprise expenses. It’s generally accepted that three months’ salary is about the right amount. As with any investment, the old rule of thumb probably holds true: don’t invest what you can’t afford to lose.
3) Are you comfortable with the risk?
Peer-to-peer lending – like any kind of investing – puts your money at risk. You need to be sure that you’re comfortable with this, as it is possible that you’ll end up getting back less than you initially put in. You should know, too, that it’s not covered by the Financial Services Compensation Scheme (FSCS).
4) Do you understand peer-to-peer investing?
If you’re going to be putting your hard-earned money somewhere, it’s important to know what it is you’re investing in. Could you explain it in simple terms to someone else?
5) Are you able to use your ISA allowance?
Plenty of P2P providers offer an Innovative Finance ISA (IFISA), which means you can invest in P2P lending and not have to pay tax on the interest you earn.
So long as you don’t exceed your ISA allowance (£20,000 for the 2018/19 tax year, split across all ISA types), it’s a tax-efficient way to put your money to work. Just note that you can only contribute to one IFISA per tax year and tax treatment will depend on your individual circumstances, and may be subject to change in the future.
6) Are you diversified?
Putting all your eggs in one basket is never an advisable strategy. Most experts would suggest investing in a variety of asset classes in order to spread your risk. It means that if one investment goes bad, you’ve got the rest of your portfolio to fall back on.
P2P is often used by investors to diversify their portfolio – for example, one that is over-exposed to the stock market.
However, the same applies to your the P2P portion of your portfolio. You should make sure it isn’t tied up in just one loan. Plenty of P2P providers make this easy for you by automatically diversifying your investment across multiple loans.
7) Have you spoken to a financial adviser?
We recommend that everyone seeks the help of a financial adviser before making an investment decision. P2P isn’t right for everyone, and getting expert advice is the best way to make sure your portfolio is set up to achieve your goals.