Growth Street ISA: Is It P2P, What Are The Risks & Does It Beat The Classic Account?
There's a lot for lenders to learn about the Growth Street ISA, launched in 2019. Take a dive into all the important aspects right here, and find out how it compares to the Growth Street's ordinary lending account.
The Growth Street ISA is covered by the reserve fund
Just ticking off a simple point first, which is that Growth Street's ISA is covered by its reserve fund.
Also covered by the wind-down scheme
As you will learn a little further down the ISA is set up somewhat differently to Growth Street's regular P2P lending account, but it is still covered by the funded wind-down scheme, which is in place to make it easy for loans to continue to be repaid to lenders if Growth Street* itself was to go out of business.
You earn money even when your money isn't being lent out
The Growth Street ISA pays you 5.8%, which is fixed for 12 months. You are expected to earn this even if Growth Street doesn't currently have all your money in the ISA on loan.
Growth Street has minimised the risks of doing that
…Yet paying ISA lenders interest regardless of whether there are enough loans creates inherent risks – which might impact either ISA lenders or lenders using Growth Street's ordinary lending account.
Take this hypothetical scenario: imagine if a lot of lenders pile in with lots of cash – which Growth Street has to pay back with interest – and then high-quality borrowers start to dry up?
In that case, Growth Street would still be committed to keep paying 5.8%, so it will either have to take on riskier borrowers to fill up on loans, or it will leave some of your money unlent.
In the latter case, it might then have to either take the financial hit itself by paying the additional interest out of its own pocket. Or it might have to use other measures, such as reducing the amount it is paying into the bad-debt reserve fund on a regular basis.
Thankfully, the risk here should be very limited by the fact that these bonds are for just one year. That is a highly sensible precaution, which means just a little bit of short-term pain at the worst.
In addition, Growth Street has recently received £17.5 million in investment, which could potentially be used to save the P2P lending site from a damaged reputation.
The ordinary P2P lending account is prioritised
Surprisingly, lenders in the ordinary lending accounts are prioritised to get their money lent out first. Growth Street said that they will not try to prop up ISA interest payments by diverting loans to ISA lenders. ISA lenders get their fixed interest and ordinary lenders get to lend first.
You earn higher rates – for a fee
In return for the higher rates (the ordinary lending account currently pays 5.3%), you need to pay back 1% to Growth Street if you decide to leave within 12 months.
The Growth Street ISA* is , but that was more complicated to figure out for us than usual.
In a legal and technical sense, it works a little differently to otheraccounts and it's even different to Growth Street's own regular P2P lending account.
What's the big deal about being “P2P”?
It isn't always straightforward to establish if a lending account is truly P2P lending.
4thWay's definition ofis that it is direct lending between borrowers and lenders, or there is otherwise a legal structure in place that provides the same level of reassurance for lenders.
The benefit of the P2P structure is best explained by telling you about the alternative.
The alternative tois to lend to one business, and then they lend on to other lending businesses. In this case, you're not lending directly to the end borrower. If that business you're lending to goes under, there's a risk that any repayments from end borrowers will be split between different parties.
In that case, individual lenders will get some of their money back, but if the closed lending business owes Barclays £10 million, that bank will also have a claim on some of the money you have lent, as and when it's repaid by the end borrowers. Any other businesses that were owed money by the lending business will also have a claim on it.
A peer-to-peer setup, therefore, lowers the risks.
How to turn lending into “P2P”
The main way to turn lending into P2P is simply for the P2P lending site to arrange legal contracts directly between end borrowers and the individual lenders. But it's not the only way.
One of the other ways thatis carried out is through companies called “special purpose vehicles” or “SPVs”.
To that end, many P2P lending sites set up a brand newfor every new loan that is arranged. That loan is put into the , rather than passing through the P2P lending site's own company and accounts.
Eachis a company that is otherwise an empty vessel with no debts or operations, and it doesn't buy or sell anything. It can't rack up a load of debts if it doesn't do anything.
Assuming all the legals are in order, the repayments on the loan held in theare protected from being considered part of any bankruptcy proceedings. That's in the event the P2P lending site itself goes bust.
This is a very common, and perfectly legal, use of SPVs – long before the P2P lending industry was born. It's why they're often called “bankruptcy-remote entities”.
Over time, SPVs are likely to be proven to be a good way to ensure lending is “P2P”.
What about the Growth Street ISA?
Growth Street's ISA introduces toa much older use of SPVs: Growth Street puts lots of loans inside the same . Not an for every loan.
Confusing sentence alert: according to Growth Street, its ISA is set up to put all ISA lending within a mini-bond that sits within an.
So far so unclear? I'll break it down for you:
- Unusually for peer-to-peer, all the ISA lending goes into the one company, rather than each loan getting its own .
- Lenders are actually lending to the through a mini-bond.
- A mini-bond is basically just a loan to the .
But, while you are lending to a company that is an, its only purpose is to contain the loans and not conduct other operations. These loans are protected from a Growth Street bankruptcy.
For people opening the Growth Street ISA, it's therefore closely equivalent to having actual contracts with all the end borrowers, and it's therefore.
Growth Street* has confirmed that banks or other companies that are owed money by Growth Street can't make a claim on the money you are lending, in the event that Growth Street goes out of business.
Is the Growth Street ISA better than the ordinary lending account?
I'd say there's not too much in it. The risk might be a tick higher for the Growth Street ISA and unlike the ordinary account there are exit fees. But for that you get a little more interest.
We had some more simple questions for Growth Street, so here's the brief Q&A:
Will you allow partial transfers into the?
Will you allow partial transfers out of the?
No. Each investment within a single bond issue will have to be fully redeemed.
Partial transfers out can help if you want to set up lots of How To Lend Across Multiple In One Year!in the same year, which you're actually allowed to do – if you do it right. Read how in
Is there a minimum opening deposit or minimum contribution?
There is no minimum opening deposit amount.
What is the minimum lending amount?
The minimum investment in a single bond issue is £10. Any investment amount must be in £1 intervals.
What is the minimum transfer-in amount (from other cash, share or IF ISAs)?
There is no transfer-in minimum amount.
What is the maximum transfer-in amount?
There is no maximum transfer-in amount.
Will investors with ordinary accounts automatically be able to divert repayments and interest to their?
They will not be able to do this. Investors will have to wait until currently lent out funds are repaid, then they will be able to withdraw these from their regular account and deposit them into their Growth Street ISA account.
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Independent opinion: the opinions expressed are those of the author and not held by 4thWay. 4thWay is not regulated by the ESMA or the FCA, and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.
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*Commission and impartial research: our service is free to you. We already show dozens of P2P lending companies in our accurate comparison tables and we keep adding more as soon as they provide us with enough details. We receive compensation from Growth Street 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.