How To Lend Money To Earn Interest | Peer To Peer Lending
In the low-interest-rate environment, every investor is looking for an investment option through which they can earn high returns. Peer to peer lending offers an excellent opportunity to investors to lend money to individuals or businesses. And in return, make high interest when the borrowers repay the loan amount. However, many investors think that lending money directly to individuals can be riskier than traditional saving accounts. Therefore, P2p lending is becoming popular among investors because of its benefits compared to traditional investment options. If you want to lend money to earn high-interest rates, it can be worth considering p2p lending.
As a beginner, you may have many questions in your mind, such as p2p lending, how to start investing, the risks involved, and whether you have to pay tax on your p2p income. In this article, we will cover all these questions so that you can decide whether you should invest in p2p lending or not.
What Is P2p Lending?
Peer to peer lending takes place through online platforms that work like marketplaces. p2p platforms bring the borrowers and lenders together. You can lend money to individuals, businesses or property developers. Both the investors and borrowers can get benefits from p2p platforms. Borrowers can get quick and easy funds while the investors can make high-interest rates compared to standard bank loans. P2p platforms allow you to choose the borrowers you want to lend money to. While others also offer auto-invest options and divide your capital across multiple borrowers. It helps you in the diversification of your investment portfolio. However, you must keep in mind that p2p lending comes with some risks that you should consider before investing funds.
How To Start Investing In Peer To Peer Lending?
If you want to lend money through a p2p platform, you should compare all the platforms present in the market. This way, you can select a platform offering a competitive interest rate and reasonable terms.
To start investing in p2p loans, you have to follow these three simple steps:
- Make an account on a p2p platform of your choice. Deposit funds either as direct transfer or using a debit card.
- Review the loans available at the platforms to select the borrowers or select the auto-invest so that the platform can do the hard work for you and invest your money among multiple borrowers.
- You can select a loan with different terms, such as 3 or 5 years. However, most platforms charge fees from the borrowers and investors, and you have to pay it if you want to lend money through these platforms.
Risks Associated with P2p Lending
Like all the other investments, p2p lending comes with some risks. Therefore, it is better for you as an investor to understand these risks so that you can take measures to reduce risks and earn more profit.
Risk Of Default
The primary risk in peer to peer lending is the risk of default. If a borrower fails to repay the loan, you may lose all your money. The more the default rate of a platform, the more the chances of losing money. So, you should check the default rate of a platform before choosing a platform. Some p2p platforms offer contingency funds to cover the default loans. But it is of no use when a number of borrowers default simultaneously.
P2p Platform Going Bust
If the p2p platform goes bust or goes out of business due to lack of income, you can lose all your investment. However, suppose the platform is regulated by the Financial Conduct Authority (FCA). In that case, the company has to keep lenders’ money in ring-fenced accounts that are separate from their funds.
Risk Of Early Or Late Repayment
If your loan amount is repaid early or late, you can not earn the expected returns. If the loan amount is repaid early, you can invest it in other loans, but you may not be able to get the same interest rate.
No Government Protection
When you invest money in banks, your investment is protected by the government. On the other hand, in p2p lending, there is no protection by the Financial Services Compensation Scheme in case of borrower default.
Peer To Peer Lending And Tax
The repayment of your capital and the interest rate that you earn from your p2p loans is termed your income, and you have to pay tax on it. However, if you make an Innovative Finance ISA (IFISA) account to invest your personal savings allowance in p2p loans, you can earn tax-free interest. It allows basic rate taxpayers to make up to £1,000 interest-free while high rate taxpayers can earn £500 tax-free interest. However, you have to pay tax on the interest you earn above this limit according to the HMRC rules.
Now that you know all the necessary information about peer to peer lending, you can choose to lend money and earn a high-interest rate. Furthermore, if you take measures to mitigate the risks and diversify your portfolio, you can earn double-digit income through p2p lending.p2p lendingp2p loanspeer to peer lending