How Secure is Peer to Peer Lending?

The popularity of Peer to Peer Lending platforms has soared in recent years. Investors, understandably disgruntled by the poor interest rates from high street lenders since the 2007 global recession, have been turning to alternative sources of investment. And Peer to Peer Lending is proving one of the most used by far.

But, of course, nothing is a ‘sure bet’. For investors, there is always an element of risk – usually the more they have to gain, then the bigger the risk. Although some forms of investment are riskier than others.

Peer to Peer regulated by the Financial Conduct Authority (FCS)

The benefit of Peer to Peer Lending is that a lot of the risk has been mitigated by the fact that – unlike, for example, certain direct (one-on-one) investments – most Peer to Peer Lending platforms are regulated by the Financial Conduct Authority. This means those wishing to start up a platform have to jump through a number of hoops before they are allowed to go ahead and set up. These are for the benefit of the consumer (or investor) and include disclosing how the investor’s risk is calculated along with their fee charging structure, as well as putting in place procedures in case a platform fails.

Risks of Peer to Peer

The way many Peer to Peer schemes work is that the borrower pays interest on the amount of money he or she has borrowed. This means that if the borrower can’t pay for whatever reason i.e. their business has ‘gone under’, the lender’s money (capital and interest) is at risk. By the same token, the Peer to Peer platform itself could fail and the lender could lose money that way. To ensure you as a lender are protected with Sourced, we have an ‘Orderly Wind Down Plan’ in place, just in case.

All lender funds are kept in a separate client account, this along with the wind down plan, means investors will continue to receive payments as expected.

There are Peer to Peer firms which are currently up and running, yet still in the process of becoming authorised (i.e. at the ‘interim’ stage) so it’s worth checking if the one you are considering investing in is fully authorised.

Some Peer to Peer companies advertise a ‘provision fund’ in the event a borrower defaults, so that investors don’t lose out. However, these funds may not be sufficient to repay all investors.

Another way some Peer to Peer schemes mitigate risk for the investor is by spreading his or her capital over many different investments (borrowers) with the presumption not all are going to default. This is a particularly common risk model used by many Crowdfunding platforms.

How Peer to Peer works with Sourced

With our scheme, all investments (loans) are fully secured against the property asset. We’ll let you know the loan to value ratio as well as explain the security.

Our property backed investments are fixed term and anything from six to 18 months. You will receive your investment with interest (up to 12%) at the end of the term.

It’s worth pointing out at this stage that, with property, some assets can fall in value and you may not receive all your capital back. Also, that returns are never guaranteed. And, despite being regulated by the Financial Conduct Authority, Peer to Peer Lending investors aren’t subject to their Financial Compensation Scheme (unlike savings banks).

Find out more about the Sourced Peer to Peer platform here.