Is peer-to-peer lending a good investment? Which? Common Money Problems Solved - January 2015

07 January 2015

peer-to-peer lending

In this monthly series, we share recent questions about money and the answers provided by our experts on the Which? Money Helpline.

Our experts have taken a number of calls in the last month from people wanting to know whether peer-to-peer investment was a good idea.

Some callers had seen TV adverts for specific peer-to-peer lending companies and were interested in learning more about their credentials. 

Find out more: Call the Which? Money Helpline - your financial queries answered

Peer-to-peer lending 

Peer-to-peer lending websites match up savers directly with borrowers. Lenders can access better savings rates than they would be able to get from traditional lenders, because the running costs of peer-to-peer websites are significantly lower.    

Lenders are able to choose where their money goes, with higher interest rates available to those willing to lend to borrowers perceived as more likely to default on their loan. 

These websites charge a fee for their service, typically based on the total amount lent.  

The risks of peer-to-peer lending

The most immediate risk is a borrower failing to pay back their loan. Most websites have schemes, such as secured lending or discretionary provision funds, in place to repay lenders in this scenario, but there is still no guarantee you'll get your entire investment back. 

Peer-to-peer websites became regulated by the Financial Conduct Authority in April 2014. This means they have to operate under stricter rules governing how they run their businesses. Investors and borrowers now have a 14-day cooling off period if they change their minds, for example, and peer-to-peer lenders must hold more capital.

But, as these websites aren't covered by the Financial Services Compensation Scheme (FSCS), you might struggle to get your savings back if the company goes bust. The risk of this is relatively low, as the sites are obliged to keep their investor money ringfenced from their own accounts. 

With this in mind, those looking to invest in peer-to-peer lending should carefully evaluate which website they use to do so.   

Find out more: Peer-to-peer lending websites - we review the most popular companies

Other 'alternative' investments

Almost half of last month's calls to the Money Helpline regarding investments were from members looking for a new investment.

Our experts have taken calls from people wondering whether investing in areas such as car parking and storage is a good idea.

Often, these types of ‘alternative’ investments offer very attractive rental yields and the potential for capital gains can be huge, but they are generally unregulated, meaning there is less protection for investors if something goes wrong.

Find out more: Commercial property investment - learn the basics

The Money Helpline has taken a number of calls about overseas and other non-traditional banks and accounts. For example, we took a call from one member who wanted to know how safe an account with Jakarta Bank was. It is protected by the Indonesian government, but it is impossible for us to say how secure that guarantee is. 

We have also taken enquiries about an account with the Islamic Bank of Britain, which is currently offering an attractive return. However, as this account operates under Sharia Law, the return is not actually interest and is not 100% guaranteed. This is a difference investors should be aware of before depositing any money.

Find out more: Offshore savings accounts - Which? debunks the myths

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This story was updated at 5:44pm to give more clarity to the regulation of peer-to-peer lending.