Peer-to-peer lending: What to think about before making an investment decision?

If you are a first-time investor thinking of investing in peer-to-peer lending, this article aims to give you some issues to think about or questions to consider before making an investment decision.  

Checklist before making an investment decision:

1. Always check that the P2P lender is authorised to conduct business by the Financial Conduct Authority by entering their details into the FCA register. The Register will also disclose the type of business activities the lender is authorised to undertake. 
2. Decide on the level of risk that is acceptable to you. P2P lenders grade their loans in order of riskiness. For example, loans rated as ‘A’ offer least risk and those rated say ‘E’ most risk. To confuse matters further each platform will use their own rating systems, so a loan rated ‘C’ on one platform might be medium risk and on another might be rated as highest risk. 
3. Decide on the type of loans you want to invest in as this will determine which platform you sign up to. For example are you more comfortable with secured property loans or unsecured loans to SMEs. The former will offer lower rates of return (lower risk) and the latter higher rates of return (higher risk). You may decide to invest with a consumer lender which specialises in car loans or mortgage finance. 
4. Decide how you want to invest. Most P2P lenders offer an Innovative Finance ISA option which is great if your investment does well as all capital gains and interest earned is tax free. But if your investment goes south, you cannot offset the loss against other capital gains.  
5. Depending on which online platform you choose, P2P lenders offer investors a ‘self-invest’ option or an auto-invest option. With ‘self-invest’ you decide how your capital is allocated across the portfolio of loans. With auto-invest the P2P lender makes the allocation decisions on your behalf and could split your investment into two hundred separate tranches (0.5%) to minimise over exposure to one loan and mitigate risk. 
6. Research the operational history of the P2P lender. How long have they been trading? Are they profitable? Ask questions about their investment performance. What are their target returns? Have they achieved those returns in the past? What is the default rate on their loans? How transparent are they about their borrowers? Do they co-invest alongside you and put their own capital at risk? Do they have a policy of building up a provision for bad debts? What information do they share with investors? Is there a 14-day cooling-off period? How long will your money be locked up for? Is there a secondary market to sell your investment on? What are the arrangement fees, ongoing management fees, exit fees? 
7. It is your responsibility to understand the risks of P2P lending and to determine whether investing through a P2P lending platform is the right investment product for you. P2P platforms are very clear about their position: they do not provide investment advice; they offer a range of lending products; they highlight the risks of those products; they facilitate and manage your investment. If they mis-manage it, you have no recourse to compensation. 
8. If you have any doubts or questions about your investment decision then you should speak to a regulated, independent financial adviser. To learn more about how to choose a reputable financial adviser, please click here.

Pros and cons of investing in peer-to-peer lending

If you have made your investment decision but you would like to know more about the pros and cons of investing in peer-to-peer lending, then please click here.