P2P Loans Yielding 8% - But Don't Forget Security And Acess
With new loan offerings landing imminently on site we revisit a recurring theme of our reporting on the peer-to-peer (P2P) business lending scene: the key factors of asset appraisal - security, access and yield.
Let's use these criteria to scrutinise our own P2P loans (average gross yield of over 8 per cent across £11 million facilitated loans) and top savings accounts – still with a return of just over 1 per cent on average for accounts that may be linked to a tax-free Individual Savings Accounts (see earlier article here).
Security - The extra security of the FSCS may be very attractive to some. The guarantor of up to £85,000 of deposit is effectively the UK government. Money&Co., while licensed as an independent financial adviser and answerable to the Financial Conduct Authority, does not offer such security. But we do ensure that a debenture, a legal charge, is taken on our borrowing companies' assets to protect our lenders. And our credit-analysis is very rigorous – with no bad debts in over four years.
Access - Do you need access to your cash in the short term? If so, the fixed-term provisions of the deposit accounts may seem onerous. Money&Co.'s loans can be for as short a term as one year. Most are longer, with a maximum term of five years. But if you want to take your cash back early, you can do so using our recently launched auction market. This means that you can sell your loan at any time to another Money&Co. lender.
Yield – Deposit accounts are linked to long-term interest rates, which are a lot lower than the yields offered by our borrowers. Money&Co. lenders average a gross return of more than 8 per cent. This is 7 per cent net of our fees, and all loans can be held in a tax-free ISA wrapper.
Our current offering is a fixed-rate loan of £200,000, yielding 8 per cent, property-backed, with an A+ rating from our credit committee. It's a pure loan, not a participation stake, but it offers the security of real estate (roughly at 64 per cent loan-to-value). A gross yield of 8 per cent equates to a return of 7 per cent net of our fees. The loan is closing when filled, and is currently 73 per cent bid. All loans on site are eligible for inclusion in a Money&Co. ISA. If you do not have a Money&Co. ISA yet, please click on the ISA application tab on the Home page and fill in the form. You will need your National Insurance number. The ISA allowance for 2018/19 is £20,000. For full detail on the process, see below. If you invest via our Innovative Finance Individual Savings Account (ISA – see below for a step-by-step guide to how this works) you will receive the income tax-free.
A Process Guide To Innovative Finance ISA Investment
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:
Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
Step 3: Buy loans in the loan market. Once you've put cash in your account it will sit there - and it won't earn interest until you've bought a piece of a loan. It's this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans - all loans on the Money&Co. site can be held in an IFISA - and your money will start earning tax-free interest.
The ISA allowance for 2018/19 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.