Peer to peer investments offers generous returns to people willing to take a risk. They are not FSCS backed so you can lose money. However, the interest they offer is far higher than traditional banks, so some people are willing to take a chance.
What is Peer to Peer saving?
Peer to Peer (P2P) saving is a new way of saving, which entails people cutting out banks and other middlemen to enable them to get a better return on their savings.
This relatively new industry is monitored by the FCA, but is not covered by the FSCS, Financial Services Compensation Scheme, should anything happen to the P2P company. This is why looking at the advantages and disadvantages of investing your savings could help in your decision to do so.
Advantages of Peer to Peer savings
With relatively low interest rates on savings accounts these days, P2P savings is seen as way of generating much better returns on money that would otherwise be sitting stagnating in a bank account.
Money isn’t simply lent to anyone; checks are made to ensure they are appropriate borrowers. This is all done by the P2P company, so no involvement is needed on the saver’s behalf.
Money can be split into smaller amounts and spread across lots of borrowers to minimise the risk of a single borrower becoming unable to make their repayments.
Some P2P companies have a provision scheme which means there is a better chance monies will be returned in the event of a default by the borrower, but this is not statutory and does not offer the guarantees afforded by the FSCS.
Disadvantages of Peer to Peer savings
Peer to peer saving does still come with an element of risk as it is not covered by the FSCS, which guarantees savings account money in a bank up to £85,000. So if a P2P company does go bust, then you may not get your money back.
If the P2P company does go bust then, technically, the borrower does still owe you the money. All members of the trade body are required to have insurance to pay for the money to be collected through third party agencies.
There may not be the option for a quick withdrawal of cash, as the money could be tied into a fixed long term bond and could come at a charge by the P2P company. Although, there are some accounts that offer easy access or just a month’s notice.
It is important to note that no interest is being earned while the money is in the account waiting to be lent. If you have a few thousand then it is more likely to be lent a lot quicker than a lump sum of £50,000, for example. Depositing money into the P2P account slowly is a much better way, as it will not sit in the account for too long.
What to check for
When choosing a peer to peer company, it is best that you check a few things before opening an account:
Any provision schemes - protection from income delays/capital losses
The withdrawal rules
These are just things to check for, as extensive research in this relatively new industry still needs to be carried out.