The fascinating peer-to-peer (P2P) lending market continues to evolve at pace.
The government is now consulting on plans to allow P2P lenders to place their loans within an Isa wrapper. This is great news for all concerned.
But this isn’t the only positive development in the sector. It looks like there will soon be more opportunities to invest in the businesses that operate peer-to-peer platforms.
Any investment in a platform will obviously be higher risk than making a loan, but I suspect that these investments will offer plenty of excitement over the next year.
A decent return from P2P lending within an Isa
Let’s start with a quick recap on P2P lending. The basic idea is that individual investors can lend to other individuals or businesses via P2P websites such as Zopa, RateSetter and FundingCircle. These sites have grown rapidly as more and more people have discovered that P2P sites tend to offer much better returns than old-fashioned high street savings accounts.
For example, you could currently get a 5.2% annual return on your money if you lent it for five years on Zopa.
I should add, though, that P2P lending is higher risk than a traditional savings account. The P2P lenders aren’t protected by the Financial Services Compensation Scheme (FSCS), so if something goes wrong, the government won’t help you. You’ll just have to rely on the platforms’ vetting procedures for borrowers as well as ‘protection funds’ that are offered by some platforms.
Currently, P2P loans aren’t eligible for Isas, but that is probably going to change. The Treasury’s favoured option appears to be a ‘third way Isa’. So as well as the current cash Isa and stocks & shares Isa, there might be a peer-to-peer Isa available to investors.
Most likely, these P2P Isas will be managed by the platform operators such as Zopa.
So you could invest up to £15,000 into a Zopa Isa and then use that money to make as many loans as you liked on the Zopa platform. And when one of these loans was paid off, you could use the money to make a further tax-protected loan on the platform.
The only downside with this proposal is that you would be restricted to making loans on just one platform. So if you had a FundingCircle Isa, you would only be able to lend money on the FundingCircle platform.
It’s also possible that other Isa providers, such as Hargreaves Lansdown, may be allowed to offer third way Isas. Or P2P loans might become eligible for stocks & shares Isas. My preference is for ‘third way’ Isas because I think that will be less confusing in the end. We’ll have to wait and see what the Treasury will decide after its consultation is finished.
Get in to renewable energy with crowd-funded debt securities
I’m also hoping that the Treasury will allow investors to put crowd-funded debt securities into Isas. I’m thinking in particular of a website called Abundance.
I’ve written about Abundance before – it’s a site that allows ordinary people to make long-term investments in renewable energy projects. Because the government has guaranteed the tariffs, an investment in an Abundance project is relatively low risk – lower than for a conventional stock market investment, anyway.
Abundance believes that the Treasury will probably soon launch a consultation on debt securities. I hope that happens and that these securities will be eligible for the third way Isa if that ever comes to fruition.
If you fancy investing via the Abundance website now, outside an ISA wrapper, there are two projects that are on offer at the moment. There’s a solar project that will give you a 7% annual return over 20 years, and a wind project that should pay an annual return of something like 9%.
More ways to invest in the P2P world
I also said at the beginning that I thought there would be more opportunities to invest in P2P platforms in the near future.
The best known of these opportunities is probably Lending Club, the US market leader in P2P lending. It’s expected to list on the New York stock market next month. In principle, I’d love to get involved in that, although I fear that the valuation may end up being rather rich. We’ll have to see what the listing price will actually be.
I’m also impressed that the well-known bond investor, Mohamed El Erian is investing in Payoff, another US P2P player. Payoff isn’t listed on the stock market yet, but I expect Erian will want to push it through before too long so he can cash in on the private investment he’s making right now.
If you’re keen to invest in the P2P world, another option is GLI Finance (LSE: GLIF), which is a fund that has invested in several P2P businesses amongst other things. David C Stevenson wrote about GLI in a recent magazine cover story on the whole alternative finance world.
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So these are exciting times for anyone interested in P2P lending. If the third way Isa does become reality, I’ll almost certainly open one as one of my lower risk investments.
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