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P2P Lending Costs More Than Stock Investing

…But there's a catch at the end.

Cavendish Online, the discount broker of investment and insurance products, has created a fund supermarket providing the cheapest route to buy a share ISA, with all costs included.

Cavendish Online will get you spread into a few different funds for between 0.32% and 0.7% pa costs, spreading your risk across hundreds of businesses with ease. You'll need to add maybe another 0.5% or so for the inevitable hidden share-trading costs and other minor expenses, but this is still incredibly cheap.

And that's wrapped in a tax-free share ISA at no additional cost. Right now you can legally avoid paying taxes on your share income and gains from share sales by using a share ISA. We can't yet with P2P lending, although P2P lending ISAs are expected to become available in 2015.

That's news to us!

The Cavendish story probably isn't new news, but it's news to us.

I fully lost track of Cavendish Online in the past year while I turned my attention more completely to P2P lending. But it's a company that anyone investing in shares should know about.

Most stock investors don't invest this cheaply. Someone investing in the stock market at this cost level can expect to see far higher returns than the vast majority of individual stock pickers and, for that matter, better returns than the vast majority of fund managers.

Costs are key, you see.

The cheapest P2P lending opportunities cost more

The best measure of your costs is the difference between what the borrower pays and what you, the lender, receive, because the borrower owes you for the loan and you owe the P2P lending company for managing it.

According to 4thWay data, the costs associated with P2P lending appear to start at 1.8%, although we're not given enough information by all P2P lending companies to be sure.

The costs for P2P lending include assessing risk and data, selecting borrowers, dealing with borrowers, dealing with late payments and defaults, pursuing “won't pays” in court, and more.

The costs hidden in the share price

The P2P lending costs are the expenses to your business as a lender when you outsource the management of your your business to the P2P lending companies you lend through. The entire management costs of your lending operation are within those costs.

When you invest in the stock market through the cheapest funds possible, however, much of the management costs are actually in the companies in which you're buying shares. They're not charged to you by your fund manager or stock broker. Instead, when you become a part-owner in a business through the stock market, you buy at a price that reflects the fact the company has a lot of bills to pay.

Samir Desai, CEO of Funding Circle, the largest business loans P2P lending company, recently said that the P2P lending companies can run their lending operations 40% more cheaply than the banks. This means that your lending business is cheaper to run and you're getting more off the costs.

Sources: Cavendish Online; Funding Circle

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