Peer to peer ISAs are becoming more popular in recent times because they provide higher rates of returns than traditional ISAs. But what exactly are p2p isas? Peer to peer refers to direct engagement with your peers. In essence Peer to peer lending platforms matchmake lenders with borrowers. Lenders can set the % rate of return they want to achieve on their money and offer their funds up to borrowers. Normally, the higher the % rate of return that a lender requires the higher the risk they expose themselves to. An annualised rate of return of 1% per month is translated into a 12% annualised rate of return.
Lower Risk Lending
Borrowers are analysed and rated in terms of the risk that they pose. These ratings are normally derived from the individual borrowers credit history. This allows lenders to see the risks that each lender poses and decide who to lend to. With a peer to peer ISA, lenders can choose to spread their risk by lending to several borrowers. This mitigates the risk of borrowers defaulting on their loans.
Peer to peer ISAs or Innovative Finance ISAs were announced by the Chancellor in 2015 and finally brought in on 6 April 2016. These tax wrappers effectively allowed investors to shield their peer to peer lending activities from income and CGT.
With peer to peer lending becoming ever more popular due to bank loan restrictions following the 2008 crash, peer to peer investments have become more popular due to miniscule returns from traditional banking saving and investment accounts. Moreover, following incentivisation by the government which has made the new innovative ISA more mainstream.
Many ISA providers lend to the SME market and others lend to retail borrowers. Retail borrowers generally look for lower rates and they are then matched with lenders whose rates of return match the borrowing rate they desire. The lender and borrower are then paired via the peer to peer platform. Some borrowers who have difficulty getting finance from traditional banks because they represent a higher risk maybe offered higher borrowing rates because of the risk they pose. Moreover, property developers may require loans of varying short or long terms whereas sme’s may require funds for capital investment or day to day cashflow purposes which are required rapidly, so Peer to Peer platforms are very useful for their purposes.
There are vast differences between different peer to peer ISA investment platforms. Some retain a pot of contingency funds which can be used to mitigate against the risks posed by lenders defaulting on their loans. other platforms lend small amounts to numerous lenders so that the risk is spread across a wider number of borrowers. It’s important that lenders take time to understand the varied risks between different lenders and different peer to peer Isa lending platforms. Other platforms make borrowers pledge assets against their loans for security. This security could be property or land which could then be used in lieu of a loan default to settle the outstanding balance. Other platforms insure loans so lender are fully protected. So it’s important to be aware of the differences for Peer 2 Peer ISAs and their platforms.