As the day we’re told to remember remember fast approaches, we thought it apt to countdown ten things that people often forget or misunderstand about peer to peer lending – including the availability of tax-free returns and platform lender fees. Time for these P2P misconceptions to go up in flames!
10. You CAN earn tax-free returns from P2P Lending when Investing via an Innovative Finance ISA
We’re all familiar with ISAs but research suggests IFISAs are yet to have their ‘big bang’. HMRC added P2P loans as a permitted asset class for the ISA wrapper from April 2016. Innovative ISAs offer a legitimate inflation-beating, less volatile alternative to traditional Cash and Stocks and Shares ISAs.
Proplend’s flexible ISA is a sparkler. Having recently been nominated for Best Innovative Finance ISA at the Shares Awards and named among ‘six of the best’ IFISAs in a P2P Finance News article earlier this year. You can also earn tax-free income on the platform by investing via SSAS or SIPP self-invested pension arrangements.
9. A ‘flexible’ ISA refers to your FREEDOM TO ACCESS your ISA pot – not to flexible rates of return
Whilst P2P platforms may offer either fixed rate returns on specific loans or variable (target) rates on auto-invest products, flexibility is all about (relatively) new rules from HMRC permitting ISA Managers to allow access to current and previous year funds in your ISA.
With flexible ISAs you can replace some or all funds withdrawn by the end of the same tax year. If you do plan to make temporary withdrawals, be sure to check your ISA Manager has adopted the flexibility rules before withdrawing funds – albeit many of the P2P platforms adopted the new rules from outset.
8. Your annual ISA allowance is a TOTAL LIMIT you can split between all your ISAs, not a limit for each. There will be tax penalties for oversubscribing or breaching the ‘one ISA per tax year subscription rule’.
You will have ‘oversubscribed’ if total subscriptions to all your ISAs during a single tax year are more than the annual allowance (currently £20,000). This includes beaching the allowance total at any point during that year – it isn’t only assessed at the year end.
Even with flexible ISAs that work on the basis of ‘net subscriptions’, your running total should not exceed the allowance at any point. And remember, if you have subscribed to an ISA at any point in a tax year you will have subscribed to your one of that type permitted by HMRC that tax year – even if it’s a flexible ISA where net subscriptions are zero (i.e. all subscriptions made have subsequently been withdrawn).
Whilst it is possible to withdraw all current year subscriptions from a flexible ISA and re-subscribe elsewhere, you should its important to be aware that you could not subscribe to say, another Innovative ISA during the same tax year unless the subscriptions are instead formally ‘transferred’ directly between ISA Managers.
7. You have the RIGHT TO REQUEST TRANSFERS from any existing ISA to any other new or existing ISA
Funds don’t have to stay in the ISA they were originally subscribed to – you can transfer some or all of an existing ISA pot to another ISA Manager at any time. With cash interest rates having failed to launch and new account bonus rates fizzling out, it makes sense to shop around and re-allocate your ISA pots where they work hardest for you. For example, you could transfer a Cash ISA pot to one or more Innovative ISAs – but note you would be required to transfer any current year subscriptions together.
Don’t lose the plot … tax-free returns or not, the value of your savings or investment is effectively falling if it does not offer inflation-beating interest rates. Inflation is currently eroding the value of our money at a rate of about 2.5% a year, so you could consider funding your innovative ISA(s) in this way to reallocating your overall ISA portfolio more quickly. Just like you’d diversify across P2P loans to ‘disperse’ your risk, you can invest across the various ISA types to find a risk-return balance you’re comfortable with.
6. P2P loans offer RISK-ADJUSTED RETURNS – investors should associate the return with the level of risk
Like stocks and shares investments, P2P loans offer the potential for bigger [more spectacular] returns because capital is at risk – they are not covered by the FSCS. But P2P interest rates available from one platform to the next and even one loan to the next can vary, so it’s important that people appreciate that higher returns typically mean higher risk and ensure they’re comfortable with the level of risk they’re taking on.
Stay safe … Platforms can take a number of steps to reduce Lender capital risk including securing loans against assets, keeping funds and reserves and completing comprehensive borrower due diligence. Proplend goes a step further by using LTV-based investment ‘tranches’ to give Lenders a choice of risk-return options for them to match to their own preferences. We’re considered one of the safest UK platforms with an average LTV of less than 60% and no investor losses.
5. (Like fireworks) P2P platforms come in different shapes and sizes – their INVESTMENT MODELS VARY
It can be hard to compare P2P platforms due to their sheer diversity. Some platforms offer manual loan selection and investment while others have gone fully down the auto-invest route where the platform chooses your investments for you.
Proplend is a manual select platform by default, that also offers a hassle-free ‘Auto-Lend’ option to all Lenders (targeting 5% after fees). Just like the platforms themselves, their auto-investment facilities work in different ways too, so if you’re using multiple platforms it’s important to understand exactly how each allocates.
As you might expect from a platform that prides itself on security and transparency, our Auto-Lend facility, only invests to our lowest risk Tranche A investments. It also won’t allocate more than 20% of account value to one loan and we show Lenders exactly what they’ve been allocated. We’re open about the fact that auto-investing won’t be suitable in all circumstances, so we give Lenders full control of when and if to enable it.
4. Peer to Peer loans aren’t just the ones banks don’t want. P2P finance is FASTER and MORE FLEXIBLE
Whilst banks did help light the fuse on P2P lending by vacating some of the space platforms like ours now occupy (particularly in the area of property finance), the addition of alternative finance providers has added competition and choice. Circumventing banks has not only provided investors with new investment opportunities in an otherwise low interest rate environment, it has proved essential for many creditworthy borrowers and businesses.
The loans you see on our platform will be a mixture of borrowers that have fallen foul of the inflexibility of traditional lenders as well as those where speed or capital only bases are of particular importance. Our high standards of borrower due diligence and strict lending criteria mean that only loans that satisfy both the security and return requirements of our lenders make it to the platform. By maintaining these standards, we are maintaining the trust of our Lenders in our underwriting processes and judgement.
3. UNDERWRITING STANDARDS can vary significantly – some platforms do have a problem with defaults
Investing in loans with ‘real’ rates of return is only part of the story. You should make a point of finding out what proportion of loans repay in full and on time for each platform you’re considering using.
Whilst every platform will have underwriters who assess the creditworthiness of each borrower before loans are made available to Lenders – loan ‘default’ rates can speak for themselves. As highlighted recently by the failings of a platform offering the significantly riskier development finance (that we don’t facilitate), involving multiple further drawdowns which are funded (or NOT) on the fly. The headline rates of return on offer from any platform are only as good as their capital and interest payment track record.
Specialist research agency 4thWay believe Proplend’s strength is in the security borrowers are required to offer Lenders. They describe the platform’s top-rated Tranche A investments as “astoundingly attractive for the risks involved.” And in their opinion; “The lower the risk, the less diversification is necessary to reduce your risks, so with Proplend you need far fewer loans than many other P2P lending sites to have good prospects.”
2. P2P Lending (DEBT investment) is not the same as Crowdfunding (EQUITY investment)
Often grouped together but not to be confused, P2P property lenders take a ‘first in line’ to be paid position by investing in the borrowing associated to the asset rather than taking a stake in it. P2P investments also typically maintain their value and are more liquid (through secondary markets like the Proplend Loan Exchange).
While we agree with the majority of its proposals, the Financial Conduct Authority’s post implementation review loses sight of these important distinctions when looking to impose the same marketing and investment restrictions on P2P that it deemed appropriate for Crowdfunding.
The consultation period for these proposals closed a week ago with ‘fiery’ responses expected from a majority of platforms. We hope to see a reflection of this feedback in the policy statement in 6 months’ time, to the extent that individuals aren’t told by the FCA whether they can invest and how much. Access to tax-free ISA returns should remain open and fair.
And last but definitely not least … our own grand finale …
1. ALL PLATFORMS CHARGE LENDER FEES – whether directly or indirectly by offering a lower interest rate to Lenders than they receive from borrowers
Platforms make their money by charging fees – hopefully no great revelation/surprise there. But what some Lenders and even comparison sites fail to realise is that those platforms that appear to take all their fees from borrowers are indirectly charging Lenders too. Where the full borrower rate is not disclosed or passed on, these fees are less transparent and harder to quantify (often higher).
Proplend passes on all interest from the borrower before immediately deducting its ‘Lender Fee’. It might not be how things are typically done in our industry but we’re proud to be outstanding in this respect. We believe our fee model maximises transparency and is therefore the right thing to do – even though it means we only get paid when our Lenders do.
Borrower rates should be used as a guide the relative risk-level of loans but that’s a little hard to do when Lenders are unaware what the commercial rate being charged is. Our platform fees are already on full display 365 days a year, so we welcome additional industry regulation to compell other platforms to provide fair and transparent fee information too.
Happy 5 November!
Related to this post
Proplend launches Tranche A ‘Auto-Lend’ facility
Proplend retains maximum 4thWay rating
Why you should consider reaching for a flexible ISA
Higher rates for higher risk, lower rates for lower risk
Investment tranching – A different attitude to risk
