As this is my first post on my blog, and I'm still learning how to use the website, I'm going to write about something I'm passionate about, Peer to Peer Lending.
I'll use this as a test to see how I can do with all the formatting tools. Please bear with me :-)
What Is Peer to Peer Financing
With rates of interest on savings accounts and cash ISA's striving to overpower the cost of living, many people are looking at putting their cash in to more dangerous investment opportunities which provide an improved rate of return.
Peer to Peer financing is just like investing with a banking institution, but pays higher rates. However unlike a conventional bank account, it is possible to lose capital.
P-2-P lending platforms match savers, who are prepared to lend, with debtors - either people or small enterprises.
By simply removing the middle man rather than having the overheads of regular banks, Peer 2 Peer sites can often give you more favourable rates, whether you're a loan provider or a customer who may have struggled to get a personal financial loan someplace else.
So how exactly does P-2-P financing work?
You invest through a website, but lenders work in different ways. Some allow you to choose who to lend to, while others spread your investment out on your behalf.
Consumers are usually credit-checked by a consumer credit reference organization, and also have to successfully pass a P-2-P site's very own credit-worthiness tests in order to meet the criteria for a financial loan. Many loan companies enable you to pick the credit-worthiness of a consumer - selecting a riskier individual most often leads to higher fees. The websites also deal with getting income from debtors.
Here is a short video on how P2P works
Is P-2-P lending secure?
By being linked straight to a person who would like to borrow, the most immediate risk to your money is if a consumer fails to repay capital you've lent them (referred to as 'defaulting').
Web-sites manage this danger in different ways. RateSetter, for instance, splits your investment in to £10 pieces, so it is spread out across multiple personal loans. This helps spread risk, and also signifies that if an individual client fails to repay, your whole investment doesn't get hit.
Zopa and RateSetter offer compensation funds which will automatically cover you when a borrower defaults.
Having said that, these types of reimbursement capital usually are not infinite. It could be likely that in a crash where many borrowers default concurrently, they could run out of cash, though it hasn't occurred to date.
Indeed, Zopa's more modern products are not protected by its reimbursement account.
Funding Circle takes a different strategy: there's no compensation account, however you can find higher earnings being offered.
Most importantly, P-2-P websites aren't protected by the Financial Services Compensation Scheme which ensures your capital with banking institutions and building societies up to the value of £85,000.
I hope you enjoyed my first post!
Next time - mixed assets investments like stocks, bonds and gold!