Extra Risk In Buying Second-Hand FundingSecure Loans
With most P2P lending sites, the interest is paid to the original lender and any new lender buying second-hand loan parts just buys the actual loan part.
The extra risk for FundingSecure that I have identified in this following article also likely applies to BLEND Network.
When a borrower repays early
However, with FundingSecure, when you sell a loan part then the new lender buys the loan plus all the accrued interest in the loan. For the buyer, this presents a potential, albeit small, additional risk.
I think such losses are still going to be relatively rare, but still worth pointing out to you.
If you buy a loan part for £100 and interest of £5 has accrued, and assuming the seller sells at par for £105, when the borrower repays the loan you can expect to be paid back £105 plus any interest earned since.
However, let's say that the borrower repays early. You have in your possession £5 worth of interest, which could be taxable at your own income-tax rate. If you're lending in a FundingSecurethen it won't be.
And if you're a basic-rate or higher-rate taxpayer and you don't have much money in P2P lending accounts and savings accounts then through the Personal Savings Allowance you have a good chance you won't need to pay tax. (Read our tax guide for more on that.)
Otherwise, you could have a tax bill of between £1 and £2.25. So you'll have paid £105 + up to £2.25 in taxes, but received just £105. An instant tax loss.
When you buy a loan just before it is due to be repaid
You encounter the same problem when you buy a loan near the end of its life. By this point, almost all the interest on the loan has already been accrued. So, having bought all the interest off the previous borrower, you will need to pay all the taxes on it too.
Here, the risk of a loss is higher, although my comments about dodging these taxes with the Personal Savings Allowance orstill apply.
You can read how trading loans works, and the pros and cons, in Trading Loan Parts At A Profit Or Loss.
You can see a table of P2P lending sites that allow you trade loans in Where Can You Buy Or Sell Existing Loans?
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