‘Are all peer to peer loan investments too high risk?’ and other myths

FOLK2FOLK

Recent news articles have focused heavily on emphasising the risks involved in investing via peer to peer lending platforms. Such stories could encourage a perception that all peer to peer loan investments are too ‘high risk’ and have you running for the hills. But if you did, you’d be missing out on an investment class that can be an asset as part of a balanced investment portfolio.

So, it’s essential to understand the realities, rather than the perceptions, of the risks involved. Not all peer to peer lending companies are the same and the risks involved vary hugely depending upon the platform, the nature of their product, their credit process and whether your investment is secured or unsecured.

The peer to peer sector is still young. It emerged as a reaction to the financial crisis and developed at speed. Some platforms have fallen by the wayside as a result of poor credit choices and processes from their early days.  Now, as warrants a developing industry, the sector is subject to increasingly rigorous regulatory attention. We welcome the FCA’s vigour in ensuring that peer to peer lending platforms operate with prudence and investors understand the risks involved before investing. Our investors are the lifeblood of our business, so our highly experienced credit team are never complacent about the quality of our loan book nor our credit assessment process.

To help separate the facts from some of the fiction, we address what we think are the three most common myths:

Myth #1 All peer to peer loan investments are ‘high risk’

While it IS true your capital is at risk when you invest in a peer to peer loan investment – and that it is higher risk than having a savings account – it is not true to say all peer to peer loan investments are ‘high risk’. Across the sector, peer to peer loan investment propositions range from unsecured high risk/high return stakes to a more conservative, and secured, end of the spectrum which is where FOLK2FOLK sits.

Myth #2 You’ll lose all your money if you invest via peer to peer platforms

You ARE at risk of losing money when you invest via peer to peer lending platforms, because all investments carry degrees of risk.  All investors have a different risk tolerance and return appetite which is why peer to peer lending, with its broad array of lenders, levels of return and approaches to risk, has grown as an alternative investment option.

Approaches to reduce risk vary from platform to platform. At FOLK2FOLK, we only offer loan investments that are secured against UK based land or property.  We don’t offer unsecured lending which we consider to be riskier.  We only lend up to 60% of the open market value of the security property and a charge is held over the property.  At time of writing, none of our investors have actually lost money in our six years of business, but past performance is not a reliable indicator of future trend.

Myth #3 There’s not much difference between the peer to peer platforms

Peer to peer lending is a hugely varied industry with multiple platforms operating vastly different models, pricing structures, credit processes and approaches to risk. Comparison is far from straightforward – it’s certainly not comparing ‘apples with apples’ – and the behaviour of the few is not a reflection of the practices of others.

 

We advocate the importance of always understanding the risks, as well as the rewards, of investing in peer to peer loans.  We highlight the risks in our Lender & ISA Guide and illustrate the relative risk and reward of FOLK2FOLK loan investments when compared to each other in our handy infographic.