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The Biggest Risk in P2P Lending

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By on 24 December, 2014 | Read more by this author

There's one risk that is completely ignored by many financial institutions.

Dangerously for savers and investors, this blinkered vision filters through to financial and news websites, and even to professionals who should know better.

This risk is such a huge risk for people saving in savings accounts that most savers are almost guaranteed to see their savings be worth considerably less after just four or five years.

And savings accounts are touted as “low risk”!

We'll take that, thank you!

If you haven't guessed, I'm talking about rising prices – inflation. Inflation is like the government saying that it's going to take, say, 15% of your savings from you every four or five years. And sometimes they hit you with a bigger whack out of the blue (when they print more money).

And yet they still leave you thinking you're richer, because the government then fixes it to make it seem like your account says a higher amount.

Short-term lenders have higher inflation risks

If you P2P lend for shorter periods, it can be difficult to get high enough interest rates to compensate you for inflation risks.

You generally get higher rates for longer loans, whereas you can expect between 2% and 3.5% per year for shorter loans.

That doesn't mean short-term lending is a write-off. If you can't afford to lend for longer, you can still get far better rates than you will get in savings in the bank, most of the time. So you'll probably preserve your wealth far better than someone with an HSBC or Barclays savings account.

And soon we'll have P2P ISAs, which means you can lend tax free. It'll make it easier for more people to beat inflation if they don't have a tax bill too.

Short-term lending doesn't have to be low rate

It's not always the case that short-term lending is low rate. In 2014 alone, Funding Circle, for example, has matched over 800 loans lasting between six months and two years, the majority of which gave lenders an interest rate well over 8%.

P2P lending companies offering short-term property loans can also give you higher interest rates, although you have to be very confident that they're doing a safe job, since these sorts of loans are inherently more risky than other types of loans.

And you have one or two other choices, but none of them are the P2P lending companies that are both lower risk and easy to use. In other words, not good as a closest possible substitute to savings; they require some knowledge and some work.

You've got to hold on…

If you're going for longer, higher-rate P2P loans and you get a lot of bad debts, you could also lose to inflation – and a lot more.

This clearly applies to high-risk P2P lending, but in extreme economic times it could also apply to safer ones.

Take a look at Funding Circle's stress test, for example. It found that in an economic crash and high inflation environment, you would lose to inflation – pretty badly, if you're a taxpayer – if the economy and inflation turned nasty. And you'd be losing to inflation despite still earning 5.5% interest after Funding Circle's fees and after bad debts.

Yet the situation would turn around eventually, provided you haven't taken on too much risk. It just might take you a few extra years of higher rates to get back to where you were.

Typically, you recover ground fast in these situations as inflation decelerates. It's the same with the stock market.

So you've got to hold on.

*Commission and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Funding Circle, and other P2P lending companies not mentioned above when you click through from our website and open accounts with them. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.

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There's the savings way, the property way, the stock-market way, and now there's the peer-to-peer lending way. The 4thWay® to save and invest.
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What does 4thWay do?

We help people save and make more money, more safely when they cut out the banks and lend directly to other people and to businesses.

Why use 4thWay?

4thWay® is shaped by investors, bank risk modellers and a senior debt specialist, and we're governed by our users to ensure our comparison services and research are trustworthy and complete.

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×

Why are Orchard’s interest rates different?

Orchard’s lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Orchard’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Got it

×

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×
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