Cliche, truism, hoary old chestnut? Take your pick, but the truth remains: there’s no profit without risk. We constantly stress the importance of understanding risk. It’s a precondition of lending – the attractive yields our lenders have achieved (over eight per cent across more than five years) comes at the price of the risk to capital. The fact is that we have an annualised default rate of 0.03 per cent, and a relatively slow growth rate – because we vet our loans very, very carefully.
The news excerpt below from AltFi should therefore come as no surprise. Not all platform lenders are as conservative in their risk assessment as Money&Co.
In response to questioning by former City minister Lord Myners, the government has revealed that the British Business Bank’s investments in peer-to-peer loans are experiencing higher-than-average losses.
The news came from Conservative Lord Callanan, who answered Myners question on whether default rates and losses were greater or lesser than the bank’s overall lending book.
“The level of losses provided for as a percentage of the net amount invested across the peer-to-peer platforms loan portfolio, is above the overall blended level for the British Business Investments’ portfolio,” said Callanan in his written answer.
This is as expected given the different risk profile and structure of the investments across the portfolio, all of which have been assessed within the Bank’s objectives and programme criteria.”
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.