Peer to peer lending platforms have been around for a long time. However, the tax-free wrapper was introduced in 2016. No big players in the p2p market offered the Innovative Finance ISA when it was first launched. But now most major firms’ offers IFISA services including Kuflink, Zopa and RateSetter.
P2p lending platforms are used by investors who are willing to lend to individuals or businesses in return for a high-interest rate, which is much better than buying cash ISA.
What type of risk is involved?
The most significant risk involved in the Innovative Finance ISA is that your funds are not protected. It is not unstable like the stock market, but with stock & shares ISA up to £50,000 of your funds are protected by the UK Financial Services Compensation Scheme (FSCS), and the protected goes up to £85,000 in the cash ISA. For FSCS, if you lose money because an authorized firm showed negligence while managing your money or gave you bad advice, then the FSCS will cover up to £50,000 if the firm fails.
If the business you have lent to goes under or your investment performs poorly, you will not be protected by the FSCS. That is the risk that you will have to take. The Innovative Finance ISA doesn’t qualify for either for these protections, so if the business to whom you have lent loan defaults, then it is unlikely that you will get your funds back.
If the peer to peer loans are secured against an asset such as some IFISA providers advertise being secured against property, then your money should be safer. Also, keep in mind that Innovative Finance ISAs come in different sizes and shapes, lending loans to consumers, property developments, small businesses, historical refurbishment, or renewable energy projects. Some of these will be secured while others won’t be. In addition, some IFISA providers are better known than others and have a high reputation. Regardless, it would be best if you did your own research before you decide to invest your money. It would help if you especially researched firms that offer return rates of up to 12%.
Without any FSCS protection, you must evaluate the platform yourself, assess its claims and how it evaluates the borrowers, its lending rates and what are the contracts like. It can be hard doing all the work on your own. So you can go online and read up on as much evidence as possible on how things are and how they are meant to be.
Where can you put your money?
The three major peer to peer lenders that we mentioned earlier have solid reputations, and their default rates are low. Kuflink offers three IFISA products; 1-year Term offering 5% returns, 3 Year Term offering 6.1% returns, and 5 Year Term offering 7.0% returns.
Kuflink spreads your investment across different borrowers, so not all of your money is at risk in case one borrower defaults on their loan repayments. However, again remember that FSCS will not protect your money, and loans are also unsecured. All your investments in Kuflink work in the same way as non-ISA, but the difference is that your returns are protected from the taxman. The firm also has a wind-down plan that pays you your money back in case of borrower default.
Similarly, RateSetter, another major player in the peer-to-peer market, offers returns ranging from 3.6% and 6.2%, based on how long you can borrow your money. RateSetter also has set up a provision fund that protects your investment. But it does mention that your capital is at risk if an increased number depletes the fund of default borrowers.
There are other considerations that you need to know before you commit to this investment. Unlike cash ISA, your money is not the part of FSCS, so if you lose your investment because of the firm’s bad performance, then it’s on you. Therefore, you have to make sure that you completely understand what you are putting your money into and how the investment is going to be structured. Not all property firms and Innovation Isa Finance are created equal. You must make sure where your money is going and how it is being used and make sure the platform is legitimate with a good track record.