Richard Litchfield, Head of Operations at peer-to-peer lending platform Lending Works, talks you through the details.  

Still keeping your cash locked away in a savings account? Recent figures have shown that over 99% of saving accounts aren’t keeping pace with inflation — meaning that those looking to maintain or grow their wealth may need to look to investing instead (Mirror).

While the risks of investment can be daunting for some, there are low-risk opportunities out there. Peer-to-peer (or P2P) lending is a relatively low-risk investment which can offer much better rates than the interest on the average savings account (our current rate is 6.5% over five years). Not only can P2P be lucrative, but it can also be much less hassle than complex investments like stocks or shares, so it’s an excellent choice for those who are looking to start a portfolio. And, with the FTSE 100 hitting a six-month low after the IMF slashed global growth forecasts back in October (Guardian), the stock market is rapidly beginning to look like a less appealing option.

Here, I’ll explain the basics of peer-to-peer lending, along with a few tips for getting started and maximising your profits.

How does peer-to-peer work?

Peer-to-peer lending is a new sort of platform which matches up investors with borrowers looking for a personal loan, all of whom been vetted in advance for creditworthiness. This platform essentially takes the middleman out of the lending process (the role which would traditionally be played by a bank or building society), meaning that both investors and borrowers benefit from better rates. Investors can kickstart their P2P portfolio with Lending Works from as little as £10, and can choose how long they want to invest their money for.

Some platforms also allow you to select your own borrowers, or you can let the platform handle this on your behalf. More experienced investors might prefer the control that this offers, while others just like to sit back and let the P2P platform handle the finer details.

What sort of returns could I make?

Returns are linked to the length of your investment term: the longer you invest for, the higher the returns will be. Currently, we offer investors 5% per annum over 3 years, but this figure rises to 6.5% p/a over a 5-year term. While long terms are best for profits, you may want to choose a shorter term if you want more flexibility or need to see returns more quickly.

What are the risks? Is there any protection?

Of course, there’s no form of investment which can ever completely guarantee you’ll make a profit, nor is there any investment strategy which doesn’t involve some form of risk. But, because peer-to-peer lending diversifies your investment across lots of different loans, your losses are balanced by your profits if a borrower defaults on their repayments.

In addition to diversification, there are also other protections in place for investors. Some platforms have a reserve financial fund, which helps to cover any losses caused by borrowers defaulting. Peer-to-peer lenders are also regulated by the Financial Conduct Authority, which means that they must consider how to safeguard investor’s money in line with official regulations.

How can I maximise my profits?

If you want to see competitive returns, then there’s one rule to bear in mind: invest for the longest possible period you can afford. While many P2P lenders will allow you to withdraw your money earlier for a fee, it’s always better to leave it for as long as possible, as you could potentially see much higher returns this way.

I’d also recommend re-investing your earnings straight back into more loans: after all, there’s little point leaving your profits to sit in a savings account, as they won’t keep pace with inflation. Many platforms allow you to automate this process to make it even easier.

If you’d like to learn more about peer-to-peer lending, take a look at the government website to find more information, including details on how any earnings you make will be taxed.

In recent years a new way of investing has emerged, Peer to Peer (P2P) lending, and although this sector is growing fast, many people have yet to properly understand what it has to offer, how to participate and what risks are involved. This week Finance Monthly has heard from Relendex, a P2P commercial real estate lending platform on the myths surrounding P2P lending.

The first important thing to grasp is that Peer to Peer lending is a new way of investing and not an asset class in and of itself. It provides the opportunity to access investment returns that are not necessarily available elsewhere. The whole point of the structure is to bring together a number of people to meet a funding requirement via an online platform. The operating costs of the platforms are typically much lower than other types of Investment Company, this often provides a better deal for lenders and borrowers.

Though P2P is perceived in some quarters as “new”, the UK’s oldest P2P lender started business in 2005 and has now lent in excess of £2 billion. The Financial Conduct Authority (FCA) took over regulation of the sector in 2014 and most serious players are fully regulated through a rigorous process developed by the FCA to make sure that these businesses are regulated just as robustly as any other financial services business, in order to protect the interests of their customers. Since 2012, the UK Government has been supporting the P2P sector by lending large sums of public money through various platforms.

There are an increasing number of players in this market and they tend to focus on different types of proposition. It is important to remember that P2P platforms are as different as chalk and cheese. Some are fully-authorised by the FCA, reliable and professionally run with a good track record and reporting. Others are not. Platforms cover a wide range of asset classes. The most common areas are those lending to small to medium sized businesses (SME Lending) (mostly unsecured), consumer lending (unsecured) and property lending (usually secured). As we’ve said, P2P is an enabling structure not an asset class so it’s really important to understand where your money is being deployed. You will also find that some P2P platforms allow you to choose an individual opportunity and others will invest your money across a range.

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One of the fastest growing parts of the market is property lending, which grew by 88% from 2015-16. This part of the market has grown significantly as it seems the High Street banks, are unable to meet the demand from developers to deliver new and refurbished homes at a rate the current housing crisis demands.

Relendex was one of the first P2P lenders to enter this market and it allow individuals to select which projects they are attracted to and they choose how much money they want to invest – from as little as £1000. All of their loans are secured by a First Charge over property and they have returned an average of just over 8.5% per annum and although they will lend up to 65% of the value of a particular property, the average since they started business is actually below 60%.

As the established bricks and mortar banks pull out of many areas of lending, especially the making of development loans to SME house builders, Michael Lynn, Relendex's CEO, confidently predicts that if the UK is to have any chance of building the homes it desperately needs, the P2P sector must step into the financing gap. It seems that the future is bright for P2P financing with the prospect of continued dramatic growth over the next decade.

So a few tips on what to consider when looking at getting involved in P2P:

• Is the company FCA regulated? The Platform itself should be regulated. Be wary of platforms that cite a 3rd party's regulated status.
• Does it have a track record?
• Are the claims it is making for its rate of return evidence based?
• Does the management team have the expertise relevant to their sector, or are they relying on an algorithm untested in a downturn?
• Are the loans secured on assets?
• Are asset valuations and LTVs conservative?
• Does the platform offer an Innovative Finance ISA wrapper?
• How easy is it to withdraw funds and what, if any, are the costs?

By André Roque

From ZipCar to Uber, from Airbnb to Couchsurfing – we’ve all seen the rise of the peer-to-peer economy, and many of us have made use of it to earn or save extra money.

 But as we move towards a skill-and-asset-swapping culture, there are challenges ahead. So can the sharing economy survive? Or will it sink?

If we look at some of the biggest names in the asset-swapping game, Uber and Airbnb, we can see that they have already been struggling with regulatory hurdles. These hurdles come from governments that are still trying to understand the implications of this new landscape, and are busy creating legislation aimed at protecting their assets as well as the public’s.

For those who have enjoyed the benefits of Airbnb and Uber etc., asset sharing may feel like second nature – but the wider landscape is still fragile and yet to be explored. As is evident by the Financial Times’ Sharing Economy Summit, where the most informed brains came together to point out the possible pitfalls and concerns for those navigating this new marketplace.

Fairness

A lot of sharing economy-reliant companies are (in theory) just connecting those with a skill (I can drive and need some extra money) with those who require that skill (I have a little money and need to get somewhere by car). But how can a company that’s just connecting people with services they require be sure their labour is in a secure and properly benefitted working environment? Zero-hours contracts aside, there are concerns that a female cleaner, for instance, can be denied employment status, and therefore maternity pay and other benefits, despite working for a single company.

There are companies already working to address this issue of fairness. hassle.com for example, has strict rules around providing the London living wage to their staff. In fact, the platform’s CEO Alex Depledge says that their ultimate aim is to destroy the black markets that have been exploiting the housekeeping labour force for so long. As self-employment via online platforms becomes more common, it’s likely that governments will need to step in to protect workers.

As always, while some people are negatively affected, others can benefit from the increased demand for supporting services. It’s fair to say that more Uber drivers will mean a rise in demand for car cleaning services in the same area. A higher number of Airbnb properties will lead to a greater need for ‘on demand’ cleaning services. Homeit, a remote access provider used mostly by short term property rental hosts, is an example of one company that has spotted this correlation. It has just started to integrate cleaning services into the app, so that as you accept a reservation, you can then arrange for your property to be cleaned in time for the guests.

Trust issues

Uber has suffered massive knocks to its reputation and subsequently promised more rigorous screening processes for hiring drivers, and in these periods of mistrust it’s the traditional services that people will go back to - in this case, black cabs.

The whole idea of a sharing economy relies on utopian values, and on the delicate balance of no one abusing the opportunities it provides. We need to trust the cleaner we’re letting into our house. In the past, this was based on personal recommendation; now it comes in the form of a trusted platform. In theory, if a guest in your property damages something, you rate them badly and they can even be banned from services like Airbnb. This helps hosts to rely on the platform.

There’s also the interaction with strangers. Travellers (and hosts) may not feel comfortable waiting around to speak with a stranger. This is of particular concern to minorities and LGBTQI customers. As a result, new companies are springing up to address some of these issues, for example, Homeit provides remote access for hosts and guest – so they need never meet, and no one is left hanging around outside waiting for their host or guest to appear.

Economic impacts

Very recently, hundreds of people came together at Los Angeles City Hall for a hearing on how a tourist destination like LA should regulate its short-term rental industry. Members of the local hotel worker union as well as HomeAway, VRBO and Airbnb supporters, filled the room. The discussion was about the need for rules that place a 180-day cap on the time a room can be let during a single year. Other restrictions stated that hosts must live at the property they are renting. Discussions like these are happening all over the world, arguing that Airbnb rentals affect longer-term rental properties and increase the cost of living rent.

In Barcelona, the government is cracking down on illegal hosts who aren’t paying tax on their rental income. In 2015 Airbnb generated an economic impact of €740 million in that city alone.

In conclusion

For those of us intending to utilise the sharing economy while it’s still building up to the crest of its wave, the trials of property management, government legislation and host-wrangling could turn into a massive headache. And so, it’s the supporting platforms that are the most useful for streamlining that experience. In the short-term, the sharing economy is only set to get bigger as tech entrepreneurs come up with new and innovative ways to help us share our assets and make or save money – but in order for sharing to be the new norm, legislation and technology will need to change and develop to make the process simpler, fairer for workers, and safer for both hosts and users.

ABOUT THE AUTHOR

André Roque is co-founder of Homeit, a remote access platform, that allows you to grant guests, tenants and tradespeople (cleaners, laundry, etc.) access to your property remotely. It integrates with short-term rental platforms and also recommends tested service providers in your area.  It is easy, fast, reliable and, most importantly, safe. Designed for the new sharing economy – Homeit is perfect for travellers and hosts using platforms like Airbnb.

See: https://www.homeit.io/en/ and https://www.seedrs.com/homeit

Facebook: https://www.facebook.com/homeit.international/

LinkedIn: https://www.linkedin.com/company/homeit

Twitter: https://twitter.com/homeit_pt