Peer-to-peer: cutting out the middleman could cost you

There are a vast array of peer-to-peer lending sites. That’s why you need a company to help research and collate the ones that might suit you.

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Alternative finance isn't quite as alternative as it used to be. Peer-to-peer (P2P) lending sites, along with direct lenders, have proliferated. In the UK, they have lent a total of £15bn over the last few years, according to independent industry research firm Brismo, and a great deal more in America and China. Investors have turned to lenders largely because of the promise of decent returns in a low interest-rate environment.

Most headline rates are more than 4%, while according to Brismo yields from lending on the big platforms have averaged around 7%. But that's not a net figure, as you also have to factor back in losses from borrowers defaulting; that takes the net return back to around 4% per annum last year. Those numbers sound realistic. Indeed, both RateSetter and Zopa are offering investors roughly this rate.

Choosing the right platform

The trick is to pick the right platforms. Each one has its own rules, yield profile, and risk structure. This is where lending-platform aggregators come in. They do some of the hard work for investors, selecting the right lenders to work with and then assembling the various options into one master account for investors.

There are three relatively well-established lending aggregators, each with their own distinctive way of doing business. Orca has just launched its own Innovative Finance Isa (IF Isa) product and offers investors direct access to a variety of platforms through one online account. With Orca, all investments are held in the investor's own name, so there is no intermediary fund structure adding additional risks. If Orca were to become insolvent, investors would be given access to their investments.

Goji also offers an IF Isa, but has a slightly different way of aggregating investors' cash. It channels money through a number of bonds, which vary in interest rate and duration. This model effectively uses the bond as the main funding instrument, with money then invested in different underlying lending platforms.

The third major aggregator is called BondMason. This is similar to Goji, but much closer to a managed fund of platforms. In this structure the manager, BondMason, decides which platforms to invest in and then pays out a return. In the case of both Goji and BondMason your primary relationship is with the aggregator who invests and manages your money with Orca, investors funds go directly into a range of P2P platforms within one IF Isa.

So if Orca goes bust, you still have those underlying accounts; but both Goji and BondMason also have extensive protections in place, including living wills and plans to wind down assets, which means that even if the aggregating platform goes bust, you should (hopefully) get your money back.

The aggregators' returns also vary greatly. BondMason has delivered returns of more than 8% per annum, whereas Orca's Pure product has a projected return of around 4.3%. But these figures don't necessarily compare like for like. BondMason invests in dozens of different lending platforms and is biased towards property. It also doesn't have an IF Isa, although it can be used by Sipp investors. Orca channels money into just five underlying platforms and does have an IF Isa. Goji's bonds are largely aimed at professionals and are only available to investors who have taken advice or have a high net worth.

It's crucial to remember that these are risky investments. In a recession losses from defaults will shoot up and even the aggregators could be vulnerable. Accessing your capital might becoming more difficult as well. But for the more adventurous, income-hungry investor looking to do some research in order to boost an income, these aggregators might make sense especially if you can get the income tax free.

PlatformProjected returnsChargesNotes
OrcaPure 4.3%Plus 5.3%No charges until April 2020, then 0.65% p/a£100 min investment.Own IF Isa.Accounts set up at underlying lending platforms
GojiDiversified lending bond 5.3% net return to the end of 2018.Current diversified lending bond 5% (one year) target return (income paid at maturity).Renewables lending bond: three years 5.5% p/a and five years 6.5%No fees on diversified lending bond.Management and administration fee of 0.95% on value of invested funds£112m in assets, 2,199 loans, 9,500 clientsMain bonds are Isa eligible;Goji also has its own IF Isa.£100 min investment for direct lending bond and £5,000 for renewables bond
BondMasonBondMason Core target gross returns of up to 8% p/aFees range from 1% to 1.5% based on invested capital£5,000 minimum investment for BondMason Core.Invested £49m since 2015. Invests across 32 direct lending platforms.Property-backed loans account for 82% of the total.Can invest via Sipps and SSAS*No separate IF Isa

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