Regular visitors to this site that will be aware that we monitor and regularly report on the evolving relationship between platform lending and mainstream finance.
The investment vehicles that rushed in early and took stakes in platform lenders at high valuations have had some tough times. There will be more ups and downs before this particular situation settles.
But the overarching issue is mainstream finance’s reluctance to accept platform loans as a legitimate asset class – in much the same way that private equity took years to gain acceptance by institutional fund managers. It seems there’s some movement on this front. AltFi runs an opinion piece from LendingClub, arguing that marketplace lending has become a mainstream asset class, at least in the United States. Here’s an excerpt from the article.
When the first widely-known credit marketplaces, then called peer-to peer (P2P) lenders, arrived on the scene in 2007, it was with the twin goals of revolutionising consumer credit and offering a new asset class to investors. Specifically, marketplace operators wanted to make credit more widely available at lower prices – and to enable investors to access new return streams through directly funding unsecured consumer loans.
While they were initially greeted with scepticism, as an industry, online credit marketplaces have exceeded initial expectations in terms of their staying power and growth in market share. In addition to unsecured personal loans, product offerings have expanded to include auto loans, mortgages, and securitized products. The sector has proved its viability as a financing mechanism while in the process birthing a new investable asset class.
Today, marketplace lending facilitates roughly 40 per cent of unsecured consumer loan originations. On top of that, multiple academic studies have showcased its beneficial impacts on consumer credit access., A consumer lending study from the Philadelphia Fed also found that the best credit marketplaces are generally at least as efficient at assessing credit risk as the biggest banks are.
What was the root of the industry’s success? Marketplace lending developed to fill a persistent unmet consumer need, namely accessing credit at an affordable rate. This goal appealed to individual investors from the outset, who were an early and consistent source of capital, and remain so today. Even as institutional investors have entered the space en masse, retail investors continue to be important players in the marketplace lending ecosystem. Their ongoing attraction to the asset class speaks to the important role it plays in their portfolios, namely as a means of realizing potentially competitive returns and diversifying their portfolios. It also reflects how much investing has changed since the pre-financial crisis era.
Platform lending of the kind we facilitate here at Money&Co. can be a lucrative activity. The average yield achieved by our registered lenders over more than five years of loan facilitation on this platform is more than 8 per cent, before we deduct our one per cent charge. That return has handsomely outperformed retail price inflation, which has averaged around two per cent over this time.
Historical Performance And IFISA Process Guide
That figure is the result of over £19 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.