We are going to offer a comprehensive review of lending in alternative finance over the next few days. This is the first of four instalments.
Platforms like ours are relatively new kids on the block in the world of high-yield products. It’s so new the terminology hasn’t settled down. It’s known as platform lending, marketplace lending or peer-to-peer (P2P) lending.
The novelty is relative. Platform lending began in the US in the depths of the 2008 credit crunch. The banks simply stopped lending to each other and also to their business clients. The culture of the internet stepped in to fill the breach created by this crisis of capitalism. It’s interesting to note that Bitcoin’s first “reference implementation” (geek-speak for launch) occurred at this time – also, allegedly, to deal with the failure of mainstream finance.
The essence of platform lending is to bring individuals seeking a good return on capital together with carefully vetted small companies seeking funds for growth. The role of the lending platform is to act as an administrative intermediary – to do the risk analysis on would-be borrowers, collect the interest on the credit extended by the individual lenders and pay it out. Again. Lending platforms, with their communities of registered lenders, are plugging the funding gaps left by the banks.
Lending can be a lucrative activity. The average yield achieved by registered lenders at Money&Co., for example, is more than 8 per cent after more than five years of loan facilitation. That return is gross – before we deduct our one per cent charge. Nevertheless the average return has handsomely outperformed retail price inflation, which has averaged around two per cent over this time.
New Loans Latest
Project Rhapsody is now 74 per cent funded. The loan offer has an A risk rating, and provides a fixed-rate return of 8 per cent over five years.
Fuller detail is excerpted from the borrower’s offering on site below. The whole pitch – vetted according to our credit committee’s best efforts, though we cannot warrant the accuracy of the statements – is available to logged in users.
Historical Performance And IFISA Process Guide
That figure is the result of over £18 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.