Is P2P Dead? Zopa Betrays Customers As It Exits Peer-To-Peer Lending (Alternative P2P Platforms)

We’ve been running Money Unshackled for close to 4 years now, and if you’ve been following us from the beginning, you may remember that we used to promote peer-to-peer lending (P2P) as a great way to make excellent investment returns of around 6 or 7%.

During those good times we would recommend – for want of a better word – that every investor should consider having some peer-to-peer loans in their portfolio. But in 2022, should investors continue to invest in P2P loans?

Peer-to-peer lending really was an incredible way to get a good return on your money for relatively low risk. Unlike the stock market where the market value of your investments fluctuates massively on a day-to-day basis, peer-to-peer lending generally provided stability and excellent interest payments, which when left to compound would enable your investment to steadily grow more or less in a straight line.

Most of the British public are risk averse and shy away from the stock market, so that steady growth from peer-to-peer was perfect for them, which was why Zopa – one of the leading peer-to-peer providers – was able to lend out over £6billion and had 90,000 investors over 16 years.

Until recently, it looked like the peer-to-peer industry was going from strength to strength, which culminated in the 2018 IPO of Funding Circle for £1.5 billion.

But in 2020 trouble began to brew. The Covid pandemic and various government actions provided serious challenges to the peer-to-peer industry. In December 2021, Zopa – which was in fact the world’s first peer-to-peer lending provider and survived the 2008 financial crisis – announced they were closing this part of their business, which we’re calling a betrayal of their customers.

In this post, we’re going to take a look at what happened at Zopa and before them RateSetter, and what has been happening generally in the peer-to-peer industry. We’re going to look at the current state of the peer-to-peer lending market, and if you’re looking for a new platform to replace Zopa or you’re completely new to peer-to-peer lending, we’ll suggest some alternative platforms to invest your cash. Now, let’s check it out…

And while you’re here, check out the MU Offers Page which including £50 cash bonuses, FREE STOCKS from Freetrade and Stake, and Stockopedia 25% discount & FREE trial.

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What Happened With Zopa?

On Tuesday 7th December an email hit my inbox stating that after 16 years of peer-to-peer consumer investments at Zopa, they’ve taken the ‘difficult decision’ – their words – to close this part of their business. And to make the process as easy as possible for their customers Zopa Bank will be buying the entire loan portfolio at current face value without any of the fees you’d normally pay for a loan sale.

Now, doesn’t that sound awfully nice of Zopa – they’ll buy your loans at face value? And, just in case that sarcasm isn’t clear, let me say it another way. Zopa are forcefully buying the existing loans off their customers at their so-called face value and word it as if they’re doing their investors a favour.

The first problem we have with this is that collectively these older loans will be averaging a return of around 5% or more. If the loans had a market value, it would exceed the face value because interest rates today are lower than the interest rates on many of these existing loans. The dilemma investors now face is finding a new home for their money, which pays a similar rate of interest.

The second problem we have with this is that they’re selling the entire loan book to Zopa Bank – the very bank that they were able to establish over the last few years on the back of their successful peer-to-peer customers. Call us cynical but it sure as hell looks like they’ve been planning this since they first decided to launch a bank.

Why Zopa Are Closing Peer-To-Peer

In their words, “over the last few years, customer trust in P2P investing has been damaged by a small number of businesses whose approach led to material losses for customers investing in those platforms. Linked to this, the changing regulation in the sector has made it challenging to grow and remain commercially viable. We’ve therefore decided to fully focus on Zopa Bank and we will be closing the P2P business with effect from 7 December 2021.”

We have no reason to doubt that this is mostly true but what they don’t say – and this is speculation on our part – is that they can’t be bothered with the hard work and inefficiencies involved in raising capital from retail investors via peer-to-peer lending.

Instead, they have Zopa Bank, which can more easily lend without the cost and hassle of waiting for customer deposits. What most people don’t realise is that banks have a licence to create money without needing to find it first from savers or investors.

There’s an interesting article on Investopedia that explains why banks don’t need your money to make loans, which we’ll link to down below for some bedtime reading, but the bottom line is that banks lend first and look for reserves later. Or in other words, since Zopa launched a bank, the writing has been on the wall for its peer-to-peer business.

News just in – whilst we were filming, on the 14th of December, we got an email from Lending Works saying they too are closing their retail investor arm of the business. Another one bites the dust!

The Peer-To-Peer Lending Industry Is In Disarray

Some of the less well-known and in some cases nefarious peer-to-peer platforms have previously collapsed and entered into administration, which was referred to by Zopa as a reason why they chose to exit the peer-to-peer business.

However, we doubt that these platform collapses alone have been the main factor in the damage caused to the industry. The loss of industry giant RateSetter and the halting of lending by most major platforms, including the industry leader Funding Circle, has arguably caused more problems, leading to lost faith of investors.

RateSetter, which was the third biggest platform at the time, had a similar fate to Zopa. At the tail end of 2020, Metro Bank acquired RateSetter and at the beginning of 2021 they purchased the RateSetter loan portfolio, and the industry lost one of its best platforms.

When Covid struck in March 2020, major players like Funding Circle stopped lending investors’ money, instead choosing to only lend government funds via schemes designed to prop up failing businesses. In this way, they took the easy route, and realised they didn’t need investors anymore.

A Funding Circle representative told Peer2Peer Finance News that there had been no change to its plans in light of the Zopa news, adding: “We’re still planning to review retail lending once the government-backed Recovery Loan Scheme ends in June.”

We’re expecting Funding Circle to follow suit and also close the peer-to-peer side of their business.

Another major reason for the deterioration of customer faith was the sudden freezing of secondary markets, which meant investors could not sell their loans. For sensible investors this wasn’t a problem because they were prepared to lock up their money for the duration of the loans – often up to 5 years.

But many other investors took the secondary markets for granted and foolishly thought it was guaranteed. Perhaps most peer-to-peer platforms overstated how liquid the loans would be, but in fairness not many would have predicted the scale of the panic that Covid caused.

Has P2P Lending Lost Its Shine?

In addition to the difficulties we’ve already mentioned for the industry, we also think that the interest rates being offered by the peer-to-peer platforms are getting dangerously close to being too low and not worth the hassle or risk for investors.

We recall seeing rates being offered between 6-7% prior to the pandemic but now the norm is around 4%.  Don’t get us wrong, we fully expected rates to drop when the Bank of England lowered the base rate, but this was only lowered from 0.75% to 0.10%, so we’re not sure why the peer-to-peer rates dropped so harshly.

Investors are getting a worse return after the pandemic but there is potentially also an increased risk of losses. We believe that investors want bigger returns and so have gone elsewhere, but at the same time the interest rates being offered aren’t high enough to tempt traditional savers away from the comfort zone of a bank account or Premium bonds. The peer-to-peer platforms have found themselves in no man’s land – pleasing nobody.

Moreover, once upon a time, the media would raise awareness for the peer-to-peer industry as an innovate way to grow your money but now that’s all died down. It seems that peer-to-peer was the cool kid for a few years but now people are more interested in meme stocks and going to the moon with crypto.

Should You Still Invest In P2P Lending?

We think there is still a huge need for peer-to-peer lending. Let’s be frank, the rates offered by banks on a Cash ISA or Savings account is atrocious – you can currently expect around 0.6% if you shop around.

Premium Bonds aren’t much better; the prize rate is now 1% but with average luck you will probably get nothing, depending on how much you have saved.

So, with most peer-to-platforms paying around 4% you are at least defending your wealth against inflation, and you might see some real growth if inflation drops back down to normal levels.

Crypto might be making all the headlines but they’re hardly comparable asset classes. Crypto is more akin to gambling and you could make a lot of money or just as likely lose a lot of money.

A diversified global stock market fund should beat peer-to-peer in the long-term but expect a bumpy ride, plus with company valuations sky-high right now, you’d be forgiven if you consider the stock market too high risk.

And finally, the peer-to-peer industry doesn’t get enough credit for surviving an apocalyptic event like the pandemic. The government literally forced businesses to shut-up shop for months on end and ordered people to stay at home, and yet from first-hand experience, our peer-to-peer investments continue to perform.

For the platforms we were using, even when a platform has had to call in the administrators or voluntarily exited the industry, we have received every penny back of our investments without any problem. While that’s not a guarantee of the future, it does reflect well.

The Best P2P Lending Platforms For 2022

Despite the permanent loss of 2 of the 3 biggest platforms, there is still plenty of choice of platforms for investors. If and when Funding Circle start lending retail investors’ money again, they will be the biggest platform by a country mile. We’ve also had a good experience with Funding Circle in terms of interest earned, with an average annualised return of 5.8%, so fingers crossed that they stick around.

But if you want to start investing straight away, then you have the likes of Assetz Capital, Loanpad, easyMoney, Kuflink, ablrate, and others. Remember, diversification is key, and that applies to both the number of individual loans and to the platforms themselves. We encourage you to spread your money over multiple platforms to reduce the platform risk.

Many of these platforms are even offering new customer welcome bonuses when you use the special referral links found on the Money Unshackled Offers page.

Generally, they each pay £50 to new customers just for making a small investment, and you will of course earn whatever interest rate they’re offering on top, so definitely worth snapping up multiple bonuses if you plan to sign up anyway. These welcome offers come and go, so it is worth checking out the Money Unshackled Offers page for the latest offers.

At time of filming, Assetz Capital offer 3.75% on their Quick Access account, 4% on their 30-Day Access account, and 4.10% on their 90-Day Access account. We’ve used Assetz Capital for about 4 years now and really like their website and offering. However, we think the naming of their accounts is misleading as these access times can only be expected in “Normal Market Conditions”.

Loanpad is another platform we’ve had a very positive experience with. They’re currently offering rates of 3.0% and 4.0%, pay daily interest, have an easy-to-use website, and we really like their approach to protecting investors’ money. In the case of a loan default, there is a hierarchy in which losses are incurred. Loanpad investors will be repaid before the other lending partners which are big institutional investors, and before that you are protected by the borrowers’ equity. All loans are secured by property that they can sell to recover your money if the loan defaults.

Have you invested in P2P Loans and how has your experience been? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Lane V. Erickson/Shutterstock.com

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“Be the Bank” – Invest in Commercial Bridging Loans – Loanpad Platform Review

“Be the bank” – not the borrower. We just flipping love owning everything; shares, commodities, property – debt. Banks own other people’s debt, and get massively rich in the process.

Peer-to-Peer Lending (P2P) is our favourite route into the world of owning other people’s debt.

We love P2P for its high interest returns, regular cash flow, safety relative to shares, that most give sign-up bonuses on platforms that we would have signed up to anyway!

Every P2P platform we’ve invested in and reviewed up until now has lent to a mix of businesses or individuals – but there’s a way to invest purely in another type of debt through P2P – commercial property bridging loans, the high-interest business property loans for property developers that are essentially short-term mortgages.

We approached a specialist platform called Loanpad to find out how they do it.

Editor’s note: If you like the sound of Loanpad, we’ve negotiated a £50 cash back deal for you when you open a new Loanpad account and invest £1,000 – on top of the 5% interest rate! The link to this offer and many others is on the Offers page.

YouTube Video > > >

Loadpad, rated Excellent on Trustpilot, is the first platform that we felt warranted a review that specialises in property loans – short-term mortgages on huge commercial properties, which as a member of the platform you own a slice of and get paid the interest.

We’re excited to tell you that we interviewed the CEO and founder of Loanpad personally to get the inside scoop on how exactly this platform and their sector works, where it’s going, and the future roadmap for Loanpad.

Our testing revealed that Loanpad do several things differently to its competitors – welcome solutions to the problems of diversification and risk that are more sophisticated than on platforms such as easyMoney and others.

This type of investing represents a new asset class, a sub-sector of the Peer-to-Peer Lending market that you’ve gotta be involved in if you, like us, want to own everything. So, are Loanpad worthy of being in your portfolio?

The Dashboard - choose between a Classic or Premium account

What is a Bridging Loan?

At a basic level, if you were buying a house to renovate, often the banks wouldn’t give you a mortgage because the property would be temporarily in too poor of a condition to be lived in. So instead you might take out a bridging loan, which are generally short-term loans of 6 to 18 months, secured against the property.

It is a high-interest and costly way of “bridging” the gap in time between buying a property project, and getting that property mortgaged cheaply by a bank, once it has been renovated.

This kind of loan is very common on commercial, i.e. business properties. Think of a run-down central London office block that is being modernised. The property developer needs to free up cash to get the work done, but borrowing on a mortgage isn’t appropriate because the building isn’t habitable during the works.

Instead, they’d use a bridging loan. The high interest rate charged on these loans is great for the bank doing the lending, and an incentive for the property developer to get the job done quickly and the loan repaid and swapped out for a far cheaper mortgage.

Nobody has it better than the banks when it comes to investment opportunities, and the more like a bank we can be as investors, the better for us!

And now, we can take part in lending bridging loans to property developers on platforms like the one we’ve tested today: Loanpad.

How It Works – Loanpad

Regulated by the FCA, Loanpad teams up with large established lending businesses to bring investors in the platform commercial property loans to invest in. The platform is home to 1,200 investors – including me now – has £7.5m of loans under management, and a growing portfolio of big commercial property lending partners.

You as the investor are acting like a mortgage provider, lending money to businesses to develop commercial property with.

We love the idea of “being the bank” – the banks get rich by lending money to businesses, and now you have the ability to lend on commercial property too.

Loanpad gets the "First Charge" on most of their book

What you’re really doing is buying a part of a loan that has been set up already by a large lending business. The business buying the property puts in a deposit, and the lending company provides the loan. The lending company then sells part of that loan to Loanpad, who divides the rights to the interest and capital repayments on those loans to the Loanpad platform investors.

The 3rd party lending companies with the market experience are the ones who manage the loans, while Loanpad monitor and supervise as the senior charge holder.

Crucially, Loanpad investors are not the only lenders in each loan. The current ratio of loans across the platform are funded around 25% by Loanpad investors and 75% by the large lending companies.

This means there are other major players with skin in the game who could administer the loans if Loanpad ever went bust.

Plus, as investors, we can diversify our money across 4 times as many loans. And here’s the kicker – Loanpad have 1st charge lender rights on all loans in their portfolio, meaning if a borrower goes bust our investment gets the best protection. Let’s demonstrate this.

The First Charge is the last to lose and best protected in a recession

If the borrower can no longer repay the loan, the underlying property would be repossessed and money returned to the lenders, including us. But what if the value of the property had fallen, such as what might happen during a bad recession? Well first, the borrower would lose their deposit. If the property had fallen in value by more than this, then the 2nd charge lending partners would take the hit, leaving the lenders with the 1st charge to collect their money – on most loans in the portfolio this would be the Loanpad investors.

The Platform – Our Tests

Dropping a G

I dropped £1,000 into the platform, to give it a proper go and find out for myself how it works. The deposit was almost instant, certainly within the first couple of hours of me making the bank transfer.

I was receiving daily interest payments, at 4% in the Classic account. When you fire up the platform as a new user, you choose between the Classic Account (daily access with a 4% interest rate) and the premium Account (a 60 day access account with 5% interest).

Both of these accounts are available as a standard account, or as an ISA – in this case an Innovative Finance ISA, which you are allowed to pay into alongside your Stocks & Shares, Lifetime or Cash ISAs.

The platform has auto-lend and auto-withdraw features which you toggle on or off in the Preferences tab, which are useful for those of you, like us, who just want to invest and forget.

There’s also a free monthly newsletter and blog for members, which you may as well take advantage of – any free investing knowledge is worth digesting.

Commercial Property Bridging Loans - another string in your bow!

Withdrawals

We’re pleased to be able to report that Loanpad have a secondary market – the best platforms have to have this function, which lets you sell your investments to other investors, allowing you to exit the platform if you want to before the loan maturity dates.

That said, if there wasn’t anyone available to buy your loan parts, these loans are all short term anyway – between 3 and 18 months generally – so organic liquidity is decent.

The platform also has a cash fund to pay you out if you withdraw your investment too – they build up their cash until they can take on another loan, and expand naturally, but the cash that’s in the platform lying around can be used for investor liquidity too.

So access to cash is fairly competitive compared to other P2P platforms.

If you use the Premium account, remember that there is a 60 day wait to access your money, which is the price you pay to get that higher 5% return.

Withdrawing My Precious Cash

Now what you all want to know – how quickly could I get my hands back on my cash? I tested the platform’s liquidity by withdrawing my full capital in one go.

To withdraw money from Loanpad is a 2 stage process. Step 1; I transferred my capital of £1,000 from my Classic account to the Cash account. You can see my interest is all sat in the Cash account as this is too small currently to be auto-lent:

Step 1 of withdrawals: Withdrawing from the investment account "Classic" into the "Cash" account

Withdrawals are not immediate; but I initiated the transfer at 8am, and when I checked back in the afternoon the funds had moved into the Cash account. Remember, I had the Classic account with easy access; the Premium says it will take 60 days to release funds.

Step 2; withdraw from the Cash account to my bank account. This happens instantly on the platform, but the banking system takes 1-3 business days for the cash to move, which we don’t think is the fault of the platform. I released the cash on a Wednesday evening – by Thursday lunchtime I had received the full amount plus interest back safe and sound into my bank.

Interest

The interest rates are 4% and 5%, which is largely comparable with big P2P platforms like RateSetter, and lower than what you might expect with a platform like Assetz Capital or Lending Works which might aim for slightly higher risk businesses – higher risk in theory than Loanpad because Loanpad loans are asset backed.

Loanpad is backed by property and invests in a different area of the market to those platforms, and is more directly comparable to easyMoney’s P2P platform which offers interest of just 3.67% at the lower end.

As we’ve seen from our testing, interest is paid daily which is great for cashflow and visibility – but a problem for those who are investing small amounts is that interest cannot be reinvested into the platform until you have built up multiples of £10 in your cash account.

Your interest will simply build up, not benefitting from the effect of compounding until you’ve hit the magic £10 number.

What you could do is switch the auto-withdraw button to “on”, thereby withdrawing your interest to your bank account each month to reinvest as you please.

Loanpad have told us directly that they recognise this issue and have plans to enable sub-£10 investments within 6 months – this would hopefully resolve this issue by allowing investments from a penny upwards. Awesome!

Flick the switch to get automatic withdrawals of your income to your bank

Diversification and Rebalancing

We like the diversification method on this platform. You see, unlike other platforms where you own parts of specific loans on the platform, on Loanpad’s platform you own a small fraction of all the loans on the platform.

These are the loans I was invested in – these are all of the loans on the platform, all backed by 1st charge rights to the underlying physical property.

If one fails, all investors suffer equally, and likewise if one fails, you suffer less for everyone owning a bit rather than just you and a few of the other investors.

Every day, at mid-day, your portfolio rebalances. This takes account of new users on the platform and new loans added/closed out, and rejigs your allocation to each loan to smooth out your exposures.

Diversification and rebalancing happens automatically, and takes the decision out of loan picking.

This works for us, as we can’t be bothered over-thinking individual components of a well-diversified portfolio, but those of you who like to pick your specific investments will likely be disappointed here.

Protection

We’ve mentioned the innovative diversification method, the 1st charge rights to asset repossession, and the cash buffer to aid withdrawals, but there’s actually another couple of protections built in.

There is an Interest Cover fund, which is used to continue to pay you interest in the event that any of the loans failed to deliver. From time to time a borrower may be struggling and need an extension granted to their interest payment deadline, but you the investor would not in theory be affected.

And they have an Innovative Finance ISA option on the platform which protects your money from the greedy tax man. Hands off my cash, tax man!

Hands off our cash, you greedy, greedy tax man!

Vs the Competition

The platform most like Loanpad is easyMoney, another commercial property lending platform I already hold a decent amount of my wealth in, and I can honestly say that Loanpad is the superior platform.

easyMoney delivers and does what it says it will, but diversification doesn’t happen instantly on easyMoney; rather it takes a couple of weeks to spread. Loanpad does diversification instantly.

Compared to Peer to Peer Lending platforms in general, the simple user interface reminds us of platform RateSetter; on Loanpad too, you simply choose an interest rate and then you get paid exactly that rate, no messing.

All told, this is a great, user-friendly platform that we’re happy to chuck some hard-earned money into and forget, with the full expectation that it would still be there with interest in a few years’ time.

Bridging Loans – Added!

Well that’s another piece of the world we now own – commercial bridging loans. Another piece in the puzzle and a step further towards our ambition of owning the entire world!

And don’t forget – we’ve negotiated a £50 cash back deal with Loanpad for any new customer who signs up through our link with £1,000, so take advantage of that now while you can.

Have you found another way to invest in commercial bridging loans? Is this an asset class you want to add to your portfolio? Let us know in the comments below.

Written by Ben

The Best Way to Invest In Peer to Peer Lending (P2P) – Is Orca Any Good?

Peer to Peer Lending is today what the high interest savings account was a decade ago – 5%/6% interest returns on your deposited cash – actual cash in hand returns instead of pennies!

The only difference is that savers must now become investors, meaning they take on some risk – you are lending your money to people and businesses after all, and some may go bust – but some of the platforms and services like Orca seek to minimise this risk as much as possible.

It is simply fact that in the modern age of ridiculously low interest rates, to win in life some risks now must be taken to get those life changing returns.

But is there a best way to invest in P2P Lending?

Editors note: Don’t forget to check the MU Offers page when signing up to P2P platform – you could miss out on a £50-£100 cash bonus!

YouTube Video > > >

Avoid the Large Returns

Counter intuitive? Not at all. There are some P2P platforms out there that advertise returns on investment of 20% or more – what they don’t advertise is that such high returns on a zero-effort investment means risk must be sky high.

20% of nothing is a 0% return – these platforms tend to invest in one big project that may or may not succeed.

Think about it – a P2P platform is a middleman for 2 parties, a borrower and an investor, also known as the lender. The other side, the borrower, must therefore be willing to pay at least 20% of interest on their loans, meaning banks (which tend to lend more around the 7% mark) probably have considered them uncreditworthy.

Peer To Peer Platforms are a middleman for Borrowers and Investors

Focus on business and personal loans

A lot of P2P platforms deal specifically in new build commercial property projects, of the type that tend to be left part finished or made into car parks if a recession hits.

Whereas the P2P platforms we use lend to mostly small and medium sized businesses, with loans split across hundreds of borrowers.

Diversified by business activity, by amount and by project, this type of loan portfolio will include some businesses who invest in property anyway, but these become a smaller and diversified element of a wider portfolio.

Stick to the Big Names

Sticking with the big, established players in the market is in our view a sensible move.

Ratesetter and Funding Circle for example are to the P2P world what HSBC and Lloyds are to the banking world – big established platforms that are good at what they do.

There are maybe 10 really good P2P platforms that we would rate for providing a professional service with decent returns in the 5%/6% region, most of which we each have significant deposits in.

They’re always evolving and trying to improve their services and returns, but of these, our 3 favourites currently are:

RateSetter

Offering you a choice of rates around 4%-5.5% depending on whether you want instant access to your cash or don’t mind fixing it, you can set your own acceptable rate to give you greater control over your finances.

Ratesetter has a £100 sign up bonus for new users when you invest £1000, so an immediate 10% boost to your returns in year one. Ratesetter also has a provision fund, to protect users from defaults on loans, on the rare occasion when one of their carefully vetted borrowers goes bust.

To date, nobody has lost money to bad debt on Ratesetter thanks to this provision fund: it has a 100% track record over 9 years ensuring that no investor has lost a penny.

We feel our money is in safe hands with these guys, but of course there always has to be some small risk of future losses.

Assetz Capital's Great British Business Account offers one of the best returns of the Top Platforms

Assetz Capital

Another great platform, Assetz Capital offers a higher interest rate of 6.25% on its Great British Business Account.

It also gives you a £50 sign up bonus if you invest £1000 with our link, so another 5% boost in year one. All these sign up links are on our website, linked below.

Remember, on these decent platforms your investment gets split into hundreds of loan parts, lending to many, many businesses at once.

Some of these will go bust, but these losses tend to represent a sub 1% hit to your returns.

The last 7 years have seen Assetz Capital evolve from 10% borrowing rates with 5% defaults, to lower 7% borrowing rates and tiny 0.1% defaults over the past 3 years.

They’ve clearly de-risked the portfolio as they’ve grown and are being more selective about the businesses they accept as borrowers.

We can testify that in the couple of years we’ve each been using it, we have been receiving the target return.

Lending Works

Another sign up bonus, £50 for £1000 invested, another big interest rate of 6.5%. That’s on Lending Works, again with a provision fund to protect your losses (called the Shield).

Lending Works make a big deal about their Shield, which has resulted in every payment of capital and interest being paid to lenders on time since they launched in 2014.

Once you have more than an emergency fund, why would anyone leave their savings languishing in a bank savings account? 0.1% interest rate? No thanks – we’ll be using Lending Works, Assetz Capital and Ratesetter.

Many of the best platforms, including those mentioned here, have Shield Funds - Provisions that protect you from bad debt

Minimise Your Platform Risk

The reason we each started investing our wealth into multiple P2P platforms (aside from receiving multiple sign up bonuses), was to massively dilute our risk, without sacrificing returns.

You could just invest in Assetz Capital for a 6.25% return, and spread your loans automatically amongst hundreds of businesses, but what happens in the unlikely event that Assetz Capital goes bust?

This is called Platform Risk, and the way to mitigate it is to use multiple platforms.

The risk of one of these platforms actually going bust without a contingency plan is small, but why take the risk in the first place when we’re talking about thousands of pounds?

You could invest £3,000 across the 3 platforms mentioned earlier – £1,000 into each – and if one did collapse during a nasty recession, only a third of your pot is at risk.

Orca is a cross-platform service that seeks to tackle this platform risk on your behalf, but is it any good? Let’s take a look at Orca.

Orca Money

Orca Money is a platform of platforms, or put another way, when you deposit money into an Orca account it invests on your behalf into multiple P2P Lending platforms.

This is a great innovation, but falls short of the best way to invest in P2P in our opinion. The most diversified offering requires a minimum investment of £7,000, which spreads your investment across 4 platforms.

Orca: A Platform of Platforms

We’re actually annoyed that the platforms you see below are the only platforms on offer – no Ratesetter, no Lending Works, no Funding Circle.

If you invest less than £7,000, you get less diversification: £3,000 diversifies across just 2 platforms, most of which is in Assetz Capital (which we love), and the rest in Landbay (which we’re sceptical of as it is a higher risk property projects platform).

It’s the same mix when you invest £1,000. For £1,000 you are probably better off just picking one platform and being diversified across many businesses rather than putting £300 into Landbay – and scooping up a sign up bonus by going direct.

If you have £2,000 or more to invest, we say split that money across 2 or more platforms directly instead of through Orca – and achieve better diversification.

One good thing though about Orca is you can invest through an ISA, into multiple platforms.

This is not possible going direct, as you only are allowed one ISA per year. It is on you to weigh up if an ISA is important to you, versus the benefits of going direct.

The Orca Platform, which invests in up to 4 other platforms

Double Fees

Finally, diversifying your P2P investment through a third-party platform like Orca results in a double layer of fees – fees are already built into the returns of the individual platforms, but then you have Orca fees on top!

It may be worth it for the all-in-one approach, with an ISA wrapper around the whole portfolio, though it is not our preference to pay extra fees, and an ISA only comes into its own once you are making over £1000 of interest each year.

We appreciate what Orca is trying to do by addressing platform risk, but you can just go direct and open accounts with your favourite platforms.

Best Way to Invest in Peer to Peer Lending

Diversify across multiple platforms to limit your risk and scoop up all those juicy sign-up bonuses in the process.

As well as the 3 platforms we mentioned above, we also invest funds into Funding Circle, Zopa, Growth Street, and Lending Crowd – most of which also have sign up bonuses. The links for all of these are on the MU Offers page.

There's a time to double-up... and it aint with fees!

Don’t keep your money wasted in the bank. Get it working for you!

How much do you have in P2P and do you use any of the big platforms mentioned in this article? Which one do you think is best? Let us know in the comments below.

How to Reduce P2P Lending Risk and Maximise Returns?

With any investment we’re taught to diversify to reduce risk and hopefully maximise returns. But most people fail to do this with P2P Lending.

Perhaps they feel that because they are diversified across many loans on their chosen platform, they are safe.

The recent collapse of Peer-to-peer provider Lendy has demonstrated that P2P Lending is not free from risk and you could potentially lose all your money.

As advocates of P2P Lending we feel this is unlikely, and Lendy was a platform that we have not endorsed, but there are some things you can do to minimise this risk.

So, how do you Reduce P2P Lending Risk and Maximise Returns?

YouTube Video > > >

What Happens When a P2P Lending Platform Goes Bust?

Let’s look at the case of Lendy. Lendy was a P2P provider that spectacularly went into administration with lenders now wondering if they will receive anything of their investment back.

In the words of their administrators “a key part of their role is to safeguard the loans made through the company to the various borrowers.”

This sounds moderately positive, but it is unclear what each investor will get back.

No Need to Worry When You're Risk Is Spread

As the loans are between the lender and the borrower one would hope they would get the majority back but only time will tell.

How to Stop This Happening To You?

Firstly, you need to consider the returns that the platform is offering. It’s our understanding that Lendy was offering 12%, which is absurd as we’re in an era of record low interest rates.

Contrast that with the more realistic P2P returns of 5-6% that we talk about regularly.

If the lender is receiving 12%, the borrower must be paying even more. These were clearly very high-risk borrowers.

So, RULE #1 – Don’t chase ridiculously high interest rates – if something looks too good to be true then it probably is.

Don’t Invest What You Can’t Afford to Lose

To us this is obvious but time and time again people continuously do this.

If You Can't Stand to Lose Money - You Shouldn't Invest

We came across a comment on Trustpilot in regard to Lendy, where the person is criticising the lack of warnings and says he can’t afford to lose the money.

We don’t mean to rub salt in his wounds but why has this person invested money he can’t afford to lose in a high-risk investment platform?

We hope that the lesson he learns is not that investing or P2P is bad, but instead:

RULE #2 – Only invest what you can afford to lose.

And RULE #3 – Only invest in what you understand.

Diversification

Every P2P platform we have come across encourages you to invest enough in their platform to ensure you are invested across multiple loans. This is usually at least 50 or 100+ loans.

This is critical, and we suggest you make sure you do this. In our opinion you want your maximum exposure to any one loan to be no more than 2% and ideally much, much lower.

An Individual Platform Could Invest In Complete Garbage

In fact, Funding Circle says they suggest you invest at least £2,000, so you achieve diversification across 200 businesses and have exposure to any one business of less than 0.5%

Diversification Does Not Stop There

What they don’t really tell you and neither will any P2P platform for that matter is that you’re still exposed to the platform itself.

Perhaps your chosen platform is a terrible business and cannot carry out proper risk assessment of loans. The loans that you invest in could potentially all be rubbish.

Therefore, it is also critical to invest across multiple P2P platforms. This way you are spreading your risk.

Come Out Fighting and Beat the Risk

This is also a fantastic way to boost your returns because the P2P Lending market is very competitive, and they are all offering very generous referral bonuses to obtain new customers.

If you’re interested in taking advantage of such referral bonuses, we have loads listed on our website here where you can earn several hundred pounds in bonuses from very popular (and in our opinion, responsible) P2P platforms. We will be adding lots more over time.

We have also reviewed the platforms and you can find the videos on here and of course on our YouTube channel.

How many platforms you choose to invest across is up to you but a balance between practicality and risk seems like the best approach.

We like the idea of about 5 platforms, but this totally needs to be based on your comfort level. Might as well get the referral bonus from each platform too!

The ISA Problem

A major problem is you can only deposit into 1 Innovative Finance ISA per tax year.

We believe this to a be stupid and dangerous limitation set by the government as it encourages people to under-diversify.

It’s worth noting that if you are basic rate taxpayer you can earn £1,000 before paying tax on interest, so you might not even be concerned about this.

In any case, it’s probably better to go for safety first and use multiple general accounts in addition to using your one ISA.

Better to be Safe than Sorry

Better to be safe than sorry. One technique we use is to open a different ISA each year.

Of course, those juicy referral bonuses will help to soften the blow of any potential tax.

New FCA Rules

It goes without saying that you should also have investments across different asset classes.

Well the FCA is placing a limit on investments in P2P agreements for retail customers new to the sector of 10 per cent of investable assets.

It’s difficult to see how this could be enforced in practise. We don’t see how a platform can know other than if you give a declaration what other investments you have.

We understand why the FCA might want to implement this though because P2P Lending looks at first glance to be like saving in a bank, but the risks are very different.

By knowing the risks and how best to protect yourself, you will not go far wrong.

Will you be investing across multiple P2P platforms, to spread risk and take advantage of those sweet bonuses? Let us know in the comments section.

How WE Would Invest £1000 UK

Updated: 27th November 2020

How would you invest £1000? We get asked this a lot. Should you invest in stocks and shares, equity funds, gold, property, exchange traded funds, peer to peer lending? And how much should you hold in cash?

In this article we’re looking at some of the best options for investing £1000; including what we would do.

For a more recent discussion on how we’d invest £10,000, check out this video next:

YouTube Video > > >

There are a lot of investment options available to you with £1,000, but if you only have £1,000, you should make sure that your money is accessible, in case of emergency.

Safety First

The only truly liquid asset is cash – we’re saying that you should have an emergency fund of cash saved in a bank to fight financial fires with, and if you only have £1,000 in the world, a cash account would be the place to start.

Unfortunately, one of the main rules of investing is that liquidity is best when return is worst. But some banks offer Regular Saving accounts with decent interest rates, even in this post-crash era.

£1,000 - But Where Should It Go?

Stock Market

£1000 is more than enough money to invest in stocks and shares, funds and ETFs.

Many platforms including AJ Bell allow you to invest from as little as £25.This is one of our favourite all-purpose platforms, with amongst the best fees for small pot sizes.

1) Shares

So you can buy shares with £1000, but should you? Unless you just want to practise investing and don’t mind losing your money, avoid buying shares at such low amounts.

We’ve said elsewhere that we think the minimum pot size needed to buy shares is more like £6,000 than £1,000 – unless you’re using a commission-free platform.

The problem with buying only £1000 of shares is that you are unlikely to be diversified enough, unless your platform offers fractional shares.

Due to crippling trading fees on the standard trading platforms, we would spend a minimum of £1000 on each stock to get decent value; so it’s almost like you are gambling rather than investing, as you would only hold one card in your hand. Maybe it does well – maybe it doesn’t.

However; there are now some new “free” platforms get around the problem of fees, making buying small amounts of shares more realistic platforms such as Trading 212 and Freetrade, but are limited in the number of companies and funds on offer. Shares and Funds alike can now be bought fee free! – amazing.

CASHBACK OFFER for our readers: if you want a free share worth up to £200, simply sign up to Freetrade through the link on the Offers page.

2) Exchange Traded Funds (ETFs)

ETFs are amazing because they track stock market indices without needing expensive fund managers, have very limited fees and can have very high diversification.

One great place to buy ETFs is on the Vanguard Platform. Their FTSE 100 and S&P 500 ETFs are ridiculously cheap in terms of fees, and track the market almost perfectly. Some of our all-time favourite investment products.

3) Managed Funds

Managed investment funds are certainly a respectable place to invest your thousand pounds. They are often well diversified across many companies, sectors and geographies.

The problem we have with managed funds are the management fees. Fees on actively managed funds can be quite damaging to long term returns. Sometimes that fee might be worth paying.

And even then, not all funds are expensive. Vanguard also offer funds, including funds of funds!

Vanguard LifeStrategy Funds are collections of other funds and ETFs in one package – a one stop shop for access to a significant chunk of the world markets in one ultra-diversified investment.

The fees are ridiculously low too which we love. If we were starting out in the stock market, we would either start here, or with S&P 500 and FTSE 100 ETFs.

So how can we invest and diversify in the stock market with limited knowledge?

Robo Platforms

Do you want to invest your wealth without having to think too hard, for minimal fees, and with some investment advice thrown in? Then try a robo investing platform.

We would use an established platform like Nutmeg. With even small amounts of money, you get access to basic investment advice, which otherwise would have been unaffordable, and Nutmeg will make the investment decisions for you based on how you answer their questions.

You can even get 6 months without fees if you use the referral link on the Offers page – remember, fees should be avoided at all costs!

Peer to Peer (P2P) Lending

Peer to Peer Lending is a good mix of decent returns, lower risk, and increased liquidity compared to the stock market. Since the coronavirus pandemic strated however, P2P platforms have mostly put themselves on freeze to new investors.

Some are still accepting new customers though, including Loanpad and easyMoney – again, cashback offers are available for these on the Offers page.

Gold Is A Defensive Investment

What About Commodities? Gold, Oil, etc

Only buying commodities with £1000 wouldn’t give you much diversification.

You could buy some physical gold bullion or invest through an ETF, but gold doesn’t pay a dividend. It is a defensive asset though that could be useful in a downturn, but not essential when you’re first starting out small amounts of money.

What about Property?

For £1000? No chance. You can invest in funds that invest in commercial and residential property, but to buy an actual buy-to-let rental property with the leveraged returns that come with it requires a cash outlay of £30k upwards. Keep this one on the back burner for when your pot is bigger!

Where will you be investing next? Let us know in the comments below.