The P2P lending story
What is peer-to-peer?
Peer-to-Peer (P2P) lending, or marketplace lending, connects borrowers and savers directly via an online marketplace.
Marketplace lending was born in 2005 when Zopa launched with unsecured consumer loans. Since then, the landscape has evolved enormously, with numerous platforms offering a diverse range of sub-asset classes including business, property-backed, green and social loans as well as invoice financing.
P2P offers investors the opportunity to earn attractive, risk-adjusted returns. The low-cost structure of P2P platforms allows loans to be priced competitively for creditworthy borrowers. And as the market tends to have a low correlation with other asset classes, it can provide good diversification for portfolios.
Greater transparency, long-term changes in consumer behaviour and the efficiency benefits offered by technology have all contributed to the creation of a new asset class – P2P lending.
In this new ‘lower for longer’ interest rate environment, P2P investments typically offer better returns over traditional cash products. According to the Liberum AltFi Returns Index (LARI), investors in P2P can expect +5% annualised returns on average.
Cumulative loan originations for the UK industry stand at just under £7bn with £2.8bn issued in 2015 alone.
Shield up to £15,240 a year with cross-platform P2P investments from tax with the Innovative Finance ISA.
A Regulated Industry
P2P lending has been regulated by the Financial Conduct Authority (FCA) since April 2014.
Capital at risk
There is no guarantee a borrower will be able to meet timely principal and interest repayments in full. Risk is mitigated through prudent underwriting and loan diversification.
P2P platforms are not covered by Financial Services Compensation Scheme (FSCS). However, platforms have integrated other layers of investor protection through, for example, asset security, contingency fund structures and insurance coverage which differ between platforms.
Early access, or liquidity, provided by partner platform secondary markets is not guaranteed and may not be instant.
P2P lending offers investors the opportunity to gain exposure to an alternative fixed income asset class offering investors an estimated 4-7% return per annum. By taking some risk, income-seeking investors are rewarded with superior returns relative to traditional fixed income products such as corporate bonds.
How consistent is P2P?
The data below is drawn from the Liberum AltFi Volume Index (LARI) – a time-weighted index measuring what an equal-time weighted exposure to every loan made would have returned over the last 12 months.
The index currently tracks the return of the four largest UK P2P lending platforms, namely Zopa, RateSetter, Funding Circle and MarketInvoice. As per the chart below, it provides evidence of the superior and relatively stable returns that can be earned from investing in P2P compared to other cash products. For further LARI analysis, please click here.
Who could benefit from P2P?
Savers. With the latest Bank of England interest rates cut to 0.25%, a number of traditional banking institutions will follow suit – further reducing interest rates offered on a range of accounts. Savers have lost out significantly once again. By taking some additional investment risk, marketplace lending may be the opportunity they’ve been looking for.
Government and P2P Lending
The Government is keen to see the innovative peer-to-peer lending sector flourish in order to introduce much needed competition to the banking market. The government recognises the importance of small businesses getting access to traditional – as well as alternative – sources of credit.
Access to finance is crucial to businesses achieving growth objectives that, in turn, help build the economy. The World Economic Forum has estimated the SME funding gap worldwide to be $2tn.
What is the Government doing to help P2P?
The British Business Bank was established by the UK Government with the aim of increasing the supply of finance available to capital-starved SMEs.
It has since invested over £80m through peer to peer lending platforms such as Funding Circle, RateSetter and MarketInvoice. What’s more, The Treasury announced that free personal savings allowance would be applied to peer-to-peer lending from April 2016, meaning savers can now earn up to £1,000 interest tax-free.
Tax status varies with every individual and laws may change. Seek independent tax advice if necessary.
The P2P Lending report
Access Intelligent Partnership’s free whole-of-market report on P2P lending. Learn about different models available in direct lending, key industry drivers and key risks and benefits for investing in P2P lending.