Should you invest in P2P loans through your ISA?

Cash, stocks, and stocks aren’t the only choices when it comes to using your ISA allowance.

You can also support UK businesses and individuals through peer-to-peer loans using an Innovative Finance ISA (IFISA).

An IFISA allows investors to earn interest on peer-to-peer loans tax-free.

You can use part of your £ 20,000 ISA allowance, but can only choose an IFISA from one vendor.

P2P lending has grown from a niche into a regulated industry that has funded over £ 25bn in UK loans, according to AltFi’s 2020 Lending Market Report.

Well-known brands such as Zopa, Funding Circle and RateSetter have built billion pound loan portfolios, but are missing from the ISA season this year.

P2P consumer lender Zopa has temporarily suspended access to new investors to prioritize existing customers as liquidity is higher than usual.

Lender Business P2P Funding Circle is currently focused on lending under the government’s coronavirus business disruption loan program, while RateSetter exited the market following its acquisition by Metro Bank.

But there are plenty of other P2P lenders offering IFISAs with returns ranging from three percent to double digits depending on how much risk you’re willing to take, according to data from peer-to-peer analyst 4.^e Path.

This sounds attractive in a world of record interest rates.

The rewards

Proponents describe P2P loans as a happy medium against inflation between the derisory ISA rates on offer and the volatility of the stock market.

“An IFISA offers all the benefits of any ISA wrapper, the only difference with an IFISA is that your money is invested in peer-to-peer lending,” says Martin Heelam, director of investor relations at peer-to-peer. lender. Assetz Capital.

“Typically, IFISAs offer significantly higher target rates than cash ISAs and less volatility than ISAs for stocks and stocks – although, as with any investment, your capital is at risk. “

Assetz Capital, which is currently the largest active P2P lender with a loan portfolio of over £ 1 billion, allows investors to back loans to UK companies secured by real estate assets.

It offers target returns of up to 4.1% depending on the account, but the rate may differ if a borrower does not repay their loan.

Heelam says the mortgage guarantee gives investors an extra layer of protection because it can be sold to pay off the loan if the borrower defaults.

Investors can also support P2P home loans on platforms such as CapitalRise or Proplend or unsecured consumer loans with Lending Works or Fund Ourselves.

Bruce Davis, managing director of Abundance Investment, which enables investors to support green projects such as wind and solar farms, says IFISA is a more productive way for people to use their money to support businesses and jobs.

He says IFISAs are popular with young investors who don’t always feel that traditional financial institutions reflect their values ​​and attitudes towards money.

“They want to see their money ‘put to use’ and see the types of investments offered in the range of IFISAs to better meet their needs and values,” he adds.

Risky business

P2P loans can avoid stock market volatility, but they are not immune to economic problems.

As with any investment, there is a risk that you will not get some or all of your money back if a borrower is in arrears or defaults.

It can also be difficult to withdraw your invested money when you want to.

Some platforms offer secondary markets to sell your loans, but there is no buyer guarantee. Many platforms such as RateSetter and Assetz Capital had to restrict or queue withdrawals at the height of the pandemic last year to cope with investors seeking access to their money.

The platforms also set up repayment plans for borrowers hard hit during the pandemic, meaning investors could wait longer for repayment and could get less back.

Holly Mackay, founder of Product Analysts Boring Money, says these factors, along with the lack of protection in the financial services compensation regime, make IFISAs too risky for her.

“The concept is lovely – the power of the people – but retail investors have to juggle the risk of default and the risk that your offering could go bankrupt,” she says.

Some argue that these risks may be worth taking.

“Investors are paid to take a risk, the risk that the borrower will be able to make their monthly interest payments and the loan principal will be repaid when the loan matures,” says Brian Bartaby, Managing Director by Proplend.

P2P 4 Analyst^e Way advises investors to do their own due diligence, for example by evaluating management experience, credit criteria and loan performance history to get an idea of ​​the risk level of each investment.

“There have been few real catastrophes in P2P lending and the vast majority of diversified investors have made stable profits,” says Neil Faulkner, founder of 4^e Path. “But, where disasters have occurred, it has always coincided with a lack of information.”