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How To Withdraw Your Money Safely
Our research shows that if you:
- Stick to low risk lending
- Spread your money across several P2P lending websites and lots of loans
- Be willing and able to lend and re-lend for five years, and
- Don't lend when interest rates sink too low
Then your chances of losing money even if a severe recession or financial crash occurs during the period is currently low. (That's fleshed out a bit more in P2P Lending: How Long Should You Invest?)
However, I thought today that my colleagues and I writing for 4thWay have to be a bit more careful how we explain that, because in reality there are a couple of extra caveats.
The time of a recession is important
It's all about when the recession or crash occurs.
If it happens when you start lending or in the middle, our stress tests show that sticking to the strategy you can strongly expect to be fine.
That's assuming you don't panic and quit too early. Many will. Similar experiences have occurred time and again in other investments, so you need to be confident of what you're doing before you begin.
If things turn for the worse towards the fifth year
Now let's say that the disaster strikes after four years. What will happen is that lots of investors will freak out and try to sell their loans to other people. Two things will happen.
Either the individual lenders will find it difficult – or even impossible – to sell, because not enough people want to buy.
Or they will have to sell at panic prices, meaning they might get back, say, £400 for every £500 they lent out. Because that's the only way they can convince new lenders to buy at this time.
If this happens to you and me in the early years then we have no problem. We just keep the money we've got out on loan and keep lending and re-lending, because we will be the ones with the opportunity to buy those loans on the cheap, while others are panicking.
At the end of five years, you're either stuck with the loans longer than you expected or you too have to sell at a loss.
How to get out smoothly
So, really, what you need to have in mind is that, in this situation, you might have to wait for all your loans to come to their natural end.
I mean, as you're approaching five years, you stop re-lending all your repayments. You wind down.
Since your borrowers are paying you back regularly, you don't have to do a deal with another lender to buy your remaining loans off you and you don't exit for a loss.
So it might take a few extra years to get fully clear of peer-to-peer lending and it's worth bearing that in mind when you're planning your exit strategy.
So I would add to our bullet list above that you should allow five years of lending followed by natural withdrawals through loan repayments, not rushed withdrawals by selling to other lenders.