Peer to peer lending is a type of direct lending of funds to consumers and small businesses without the participation of an intermediary in the process. Generally, p2p lending is done using an online platform that matches borrowers with lenders. This type of alternative finance offers some great benefits to both lenders and borrowers.
- High returns for investors: p2p platform typically offers high returns to investors compared to other types of investments.
- An accessible source of funding: this alternative platform is more affordable for some borrowers compared to traditional loan-providing financial institutions. The reason could be the low credit score of the borrower or a particular loan purpose.
- Low interest rate for borrowers: because of intense competition, these peer-to-peer loans have a low interest rate and origination fee.
While peer to peer lending has its benefits, there are a few drawbacks to this as well:
- No Government protection or insurance: peer-to-peer platforms have no protection provided by the government. Nor there is any other type of guarantee in case of default borrowers.
- Risk: p2p loans have high credit risk since most applying borrowers have low credit scores and have been unable to get a loan from the bank. Hence, being a lender, you have to be vigilant of the default probability of the borrower.
- Legislation: p2p lending might not be provided to some lenders or borrowers because some jurisdictions don’t allow it or need the platforms that provide this service to comply with the investment regulations.
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Innovative Finance ISA or IFISA is a service provided by peer-to-peer platforms. IFISA allows you to make investments and earn tax-free interest. Any interest that you earn with IFISA investment will never be taxed, and it doesn’t count towards your savings allowance. There is a limit on how much you can invest in ISAs per tax year, and this limit is called the annual ISA limit. This limit for 2020 is £20,000. You can invest all your allowance in an IFISA, or you can spread it across different ISA types. Typically, the IFISA mechanics with p2p lending are the same as the regular peer-to-peer lending providers. There are many innovative finance ISA providers on the market that offer IFISAs. These providers allow you to lend to businesses, infrastructure development, consumers or other projects.
Every Innovative Finance ISA provider has to be authorized by the Financial Conduct Authority for providing these solutions. There is a lot of diversity within IFISA, since the industry is growing a wide range of options are becoming available to investors. Every provider specializes in a specific type of p2p lending, the loan type and interest rate offered varies based on that. Most IFISAs provide high interest rates, at times, as high as 15%. However, high interest rates also mean risky investments and your funds are not diversified across different loans read more visit our website.