What’s the best way to invest for my family? Do you ponder this question?
Anyone who has children will understand what I mean when I say that the thing I worry about most is their future. Obviously it’s instinctive to want to protect your kids, and that can come in a variety of forms. But for me one of the things that concerns me most is my children’s financial future. There’s such an unstable feeling about the world at the moment, and with Government making more and more cuts as living costs go up and up, I think the next generation really are going to have it tough.
Obviously we want to make sure we are secure as a family when it comes to finances, and we are lucky enough to have a bit of money on the side to put together into a portfolio. Yet between the derisory rates of return offered by banks on savings accounts and ISAs, and the continued instability in stock markets, it’s not always easy to decide what to do with your money.
A look at P2P lending
Yet one thing I recently came across which piqued my interest was a relatively new form of investment known as peer-to-peer lending (P2P). What these online platforms do is facilitate a simple process whereby people who have money to invest opt to lend their money directly to people who are looking for a loan. Rather than putting money in the bank and settling for a return of 1-2%, lending through peer-to-peer can offer returns of around 5-6% per year.
Platforms are able to offer rates like these because, unlike a bank, they match money from borrower to lender on a one-to-one basis, without investing it separately themselves for personal gain. In fact, they only command a small fee for acting as the facilitator, and companies such as Lending Works charge this fee to the borrower anyway. What results is a streamlined, efficient process that offers good value to both the lender and the borrower.
All good and well, but it seemed risky to me at first glance. Indeed, it turns out that a lender’s capital is at risk, and not protected by the Financial Services Compensation Scheme (which will cover you for up to £75,000 from 2016 on savings per institution) should the borrower default.
But P2P platforms have numerous methods to mitigate this risk. First of all, they don’t just let any old borrower in. They conduct thorough credit checks to ensure that only creditworthy loan applicants are approved. It is also mandatory for them to keep a set percentage of capital aside in a reserve fund to cover any arrears and/or defaults from borrowers.
Most impressive of all is Lending Works, who, in addition to this, have an insurance against borrowers defaulting for any of the typical reasons like unemployment, illness and death, along with darker forces such as fraud or cybercrime.
Balancing risk and reward
Platforms are also regulated by the FCA which adds to investor confidence, and their track record, even over the recent recession, is actually very impressive in terms of borrower default, or lack thereof. With many of the major platforms, lenders haven’t ever lost a penny. Furthermore, P2P investments will be ISA-eligible from April, meaning there will be a significant tax saving to be had on returns.
For me, it’s something I will start off with slowly, and dip a toe into the water to see how it goes. Investing is such a subjective decision, and perceptions of risk and reward vary from person to person. We’ve always put most of our money into investing in our home, but I am definitely looking at other ways of growing the family pot, and I know that we’ll never get anywhere by just leaving it in the bank. Maybe peer-to-peer lending holds the key to a sound and lucrative investment channel for us. For the long-term financial security of our children, it certainly looks to be worth giving it a try.
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