Peer-to-peer lending websites are offering very attractive rates compared to banks & building societies. In these times of very low bank rates this can appear very tempting. However, these attractive returns come with risks.
Peer-to-peer websites, which appeared in Britain about 10 years ago, bring individual borrowers and lenders together, bypassing traditional banks. The idea is that each gets a better rate: lenders receive more interest than they would get from a bank savings account, while borrowers pay less than on a bank loan.
The key difference for savers is that there is no guarantee that their money will be repaid. Any funds they lend through a peer-to-peer website are not covered by the government-backed Financial Services Compensation Scheme (FSCS), which protects bank savers up to £75,000, however P2P ISAs and FCA regulated firms would by protected by FSCS. Many people therefore remain nervous about the risk profile of the peer-to-peer lending industry.
The concept is Peer-to-peer lenders connect investors to individuals and businesses seeking loans. Due to the risk of default these products could be seen as generally suitable for clients with high risk tolerance levels. Many of these loans may be where the commercial banks declined to lend, the result being returns will be higher than a conventional deposit account but the risks will be higher too. As the saver may be unaware of the risk the P2P lender is taking, it can be an unknown quantity for the less experienced investor.
For anyone looking to invest in this market it is important to do their homework and decide if the risks involved fit their risk profile and their capacity for losses.
The most important thing to appreciate is that these are NOT DEPOSIT ACCOUNTS and investors should not confuse them as a direct alternative to them.
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