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What Is The Difference Between P2P Lending And IFISAs?
Peer-to-peer lending is lending directly to individuals or businesses, including, sometimes, property owners. IFISAs is usually the same, with the advantage that any interest you earn and gains you make are always tax free. However, there can be a minor catch to watch out for.
Some things in the world of investing can seem horribly complicated, but they usually aren't if they are explained simply and properly.
Let's see if I can do that for you here when explaining the difference between peer-to-peer lending and IFISAs.
What is peer-to-peer lending?
Peer-to-peer lending is not a phrase that has been written in stone and legally defined. So some companies call themselves peer-to-peer lending platforms when 4thWay would say they are not. The reverse is also true: some platforms want to position themselves differently and so don't say they are “P2P”, when 4thWay does.
Peer-to-peer lending is just one of several phrases that are usually used to mean the same thing: marketplace lending, online direct lending and other phrases.
At 4thWay, we define a peer-to-peer lending platform as having all four of these features:
- It is online lending or e-lending.
- Lenders lend directly to the borrowers, rather than to the platform in the middle. Alternatively, legal contracts are set up that effectively achieve the same arrangement.
- If the platform in the middle goes bust, the money that lenders have lent is ringfenced, so that the platform in the middle can't use it to pay off its own debts.
- If the platform closes down, any repayments that borrowers continue to make are still made in full to lenders, except if some of that money is needed to pay excess fees to any trustee or administrator that steps in to wind down the existing loans.
Really, what this means is that if RateSetter or Money&Co or any other P2P lending platform borrows a fat load of cash from Barclays, and then goes out of business, your loan money can't be diverted to pay back Barclays. It is still due to be repaid to you.
The risk of losing money in these cases has been low historically and I strongly expect it to remain low.
What is an IFISA?
An Innovative Finance Individual Savings Account is a tax-free wrapper.
You'll have heard of similar wrappers with the cash ISA (a tax-free savings account) or a stocks and shares ISA (a tax-free stock-market investment account).
The IFISA is for online lending. Typically, this also means peer-to-peer lending, but it seems that a minority of IFISA providers do not fit into all four of the bullets in the list above.
That means that some IFISA providers might have additional risks for lenders if they go out of business, with an additional risk that money is diverted away from you.
With IFISAs, any interest you make, or other gains, is tax-free forever. Contrast this with regular P2P lending accounts, which offer substantial tax-free gains for many people, but not so many low-tax benefits for higher or additional earners or those who are lending a large amount.
For your information, 4thWay only lists IFISAs from peer-to-peer lending sites.
There are restrictions on putting money into IFISAs. Read more about the pros and cons of IFISAs, and the restrictions, in our very comprehensive IFISA guide.
Read about peer-to-peer lending in our guide pages.