Tips

Is Peer-to-Peer Lending right for me?

Peer to peer lending is something which is becoming more popular. It is even being advertised on the television as an alternative way to save money which will increase returns. It is quite a new idea though and so many people are cautious about it. It is always right to be cautious in any decision which involves money, particularly if you do not know much about the particular investment or savings scheme.

Risky

Peer to peer lending has an element of risk to it. The idea behind it is that you use your savings to lend to others as a loan. They then repay more than was lent and you make a return from that. The way that it is set up will vary though. You may just lend to one company and the rate of return is determined by how much of a risk they are deemed to be. Other companies will spread your funds among lots of borrowers so any money that is not paid back is offset by those that do and the losses are then minimised.

High Interest

The interest on peer to peer lending accounts can be more attractive than that on normal savings accounts or even some investment accounts. This means that you may feel that it is worth trying it out because you will potentially get more back than in those types of accounts. However, this will all depend on how much risk you are willing to take. Some will also be higher interest than others and this will depend on the amount of risk that you will take with higher risk being paid more than lower risk. You may like no risk and if this is the case, then this type of account is not for you.

No FSA protection

The Financial Services Authority protect some savings and investment accounts in the case of the financial institution going bankrupt. They will do their best to recoup your losses up to a limited amount of money. Many peer to peer lending companies do not have this protection and so it poses a risk. Therefore you will need to consider whether you are prepared to take that risk or find a company that does have FSA protection, if you can. You may be happy without having that protection or you may find it to be very important to you, particularly if you are using a company that is not well known.

Long term

It is worth remembering that this sort of investment is likely to be long term. It will certainly be more likely to be profitable if you keep your money invested for longer. You may be able to get it back from some companies in the short term but it will depend on how the investment is set up in the first place, so you will need to check this out. You may find that if someone defaults on a loan, it may delay you getting back your money, so it may mean that the investment is even longer term than you had planned on.