The Risks and Rewards of P2P Investing in 2024
PEER-TO-PEER investing will celebrate its 20-year anniversary next year, yet the landscape has changed considerably since Zopa launched its P2P offering in 2005.
For a start, Zopa – along with many other P2P pioneers – no longer operates in the P2P space. In fact, a large number of P2P brands have fallen away over the past few years, either due to the pressures of enhanced regulation, or the cost of running a compliant business.
The market’s consolidation is just one of the ways in which P2P lending has changed in recent years. Here are just some of the risks and rewards of P2P investing in 2024:
REWARD: Higher returns
We are still living in a high-rate environment. At the time of writing, the UK base rate remained at 5.25 per cent, a 16-year high. These higher rates have translated into higher returns for P2P investors. At Folk2Folk, for example, returns start from 8.75 per cent, an increase from 6.5 per cent previously.
RISK: Possible rise in defaults
These rate rises also apply to borrowers, which means that across the entire P2P industry there is the possibility of a rise in the default rate. Since the dawn of P2P, the industry average default rate has been around two to three per cent, and investors have been encouraged to diversify their P2P portfolios to minimise the risk of losses. Despite this heightened default risk, Folk2Folk has maintained zero capital losses for investors to date.
REWARD: More lending opportunities
Banks have been pulling back from the lending market in recent years, which has created a funding gap for many business borrowers and property developers. This gap has been effectively filled by alternative lenders such as P2P lending platforms, resulting in more choice for investors seeking to back interesting British projects.
RISK: Enhanced regulation
Overall, regulation is good for investors as it provides safety nets and risk management tools that can help to avoid certain losses. But in the world of P2P, regulation often results in more administration for investors and platforms alike. New P2P investors are now required to fill out an appropriateness test to confirm that they understand the risks involved in alternative lending. These tests are unique to each platform, and can seem a little bit daunting to novice investors. If an investor continues to fail this test, they may not be allowed to use the P2P platform of their choice, so it is important to be well educated on the nuances of P2P investing before taking the plunge.
REWARD: Supporting British businesses
This is a difficult time for the UK economy, and many British businesses are struggling to access the finance that they need to innovate and grow. Over the past few years, P2P lenders have been extremely supportive of these businesses, offering finance to business owners who would have otherwise struggled to find funding. Folk2Folk is particularly proud of the support they have offered to the farming community over the years, thanks to their dedicated investor base who have provided an essential lifeline to this key market.
This article was initially published by Alternative Credit Investor in May 2024 and can be viewed here.
