Looking for the ideal first investment or even a new asset to add to your portfolio?
Here, Richard Litchfield, Head of Operations at Lending Works, shares five reasons why P2P lending might just be the perfect option.
Since the global financial crisis in 2008 and the subsequent recovery, there has been a mounting distrust of the established institutions among investors. Many people have begun to see the banks and building societies that were involved in the crash as damaged goods: reflected in a recent survey by PositiveMoney, which found 63% of Brits believe banks may cause a second crisis.
As a result, many people have begun to explore options outside of the traditional circles, with a growing interest in alternative investments in particular. In fact, the market for such opportunities is expected to hit a high of $18.1 trillion by 2020 (PwC), showing just how much more people are willing to place their funds in assets outside of the norm.
If you’re looking for a good option to kickstart your portfolio, you should definitely consider putting your money into the peer-to-peer (P2P) lending market. Below, I’ve set out five reasons why P2P can offer the ideal entry point into alternative investments and how it can boost your earnings.
It’s relatively low-risk
Image Source: fca.org.uk
If you’re looking for a solid first investment or an alternative asset with a low-risk profile, then peer-to-peer lending is an ideal choice. While there’s always a level of risk when it comes to investing, the best P2P platforms provide protection for their clients’ cash. Look for one that has comprehensive insurance, a reserve fund to cover any losses, and a contingency plan should the platform run into trouble. With these in place, you can have greater peace of mind.
What’s more, the P2P industry is gaining more recognition within the finance sector, with the Financial Conduct Authority (FCA) taking on regulation duties. Now that the FCA is dictating what standards need to be met, consumers can be much more confident that their money is being handled by trustworthy companies who are serious about providing a quality service with minimal risk.
It adds diversity to your portfolio
One of the best ways to secure your portfolio against risk is to ensure it’s well diversified. If you already own assets in traditional classes, such as shares, fixed-rate securities, cash, property, and commodities, an investment in P2P lending represents a further option for diversification. As a new type of asset, you have another low-risk solution for growing your wealth.
Also, the best peer-to-peer platforms will help to secure your cash by offering yet another level of diversification for extra security. They do this by not just lending your money to one or two parties but spreading it across a number of different loans, so that if one borrower defaults, only a fraction of your investment will be at risk, rather than a large chunk.
It will help you beat inflation
In the current climate, many regular savings and ISA accounts simply can’t offer interest rates that beat the high level of inflation we’re experiencing — a six-month peak of 2.7% was recently recorded in September 2018 (BBC). And, if you have an abundance of cash assets in these low-paying accounts, you may find that the value of your money is simply being eroded.
Peer-to-peer lending is one of the few low-risk assets that offers an inflation-beating rate: you can earn as much as 6.5% p.a. with an investment commitment of five-years, for instance. Platforms are able to offer such rates as you’re effectively lending directly to borrowers, without any large banking overheads to pay. By putting money that was previously sitting around in a low-paying account to work through P2P, you can ensure that it will grow in value and add to your wealth.
It can be low maintenance
With some assets, such as shares and commodities, you need to be on the ball and monitoring the markets nearly all of the time to ensure your money is maintaining its value and getting the best returns possible. And, if you want your wealth to remain consistent, you will need to employ the services of an asset manager or invest through a trust at additional cost.
With P2P lending, you can be sure that your money is earning a steady, healthy rate over time. Though you won’t see the dramatic increases in value that more volatile markets offer, you’re unlikely to experience any large dips in value, either, allowing you to take a more “hands-free” approach to your asset management. The best P2P platforms also have an option for automatic reinvestment of your earnings, which means you don’t need to worry about continuously micromanaging a peer-to-peer portfolio of loans.
You can still access your funds
For many people, being able to access funds they’ve invested quickly and efficiently when needed is an important feature when they’re making investment decisions. Many types of asset, such as property or bonds, require you to lock away your money for long periods of time, so you won’t be able to withdraw cash at short notice should it be required.
However, P2P lending platforms have provision for you to remove your funds should you need to. Typically, earnings that you’ve accumulated from your current loans can be withdrawn quickly and easily, but it’s usually possible to get timely access to money that’s already committed, provided there is another lender who can take over — the best platforms will provide an option to do this with almost zero hassle, and minimal cost. This makes P2P lending a great investment opportunity for those who are building a portfolio that’s highly adaptable to their financial needs.
Take these five great advantages of P2P lending into consideration and I’m sure you can see why it’s a great option for your investment portfolio.