Peer to Peer Lending (P2P) has grown substantially in recent years, as savers look to alternative ways to improve their interest. However there is evidence that many of those investing in P2P don't fully understand the risks involved. So is P2P another financial scandal waiting to happen?
New research from Yorkshire Building Society shows that just 42% of respondents in its national survey were familiar with the term peer to peer investment, but scarily 60% of those familiar, did not realise funds are not protected by the Financial Services Compensation Scheme (FSCS). Even more worrying is that 44% of those that were aware of Peer to Peer were unaware that investors can lose money.
What the Yorkshire Building Society research highlights is the lack of real understanding in a market that is growing at a rapid rate. While interest rates on traditional savings remain at record low levels, it’s fair to assume that many savers will be taking risks they wouldn’t normally be willing to take in order to make a better return on their cash. Would this market flourish as much as it has if interest rates weren’t so low? We doubt it. Equally when interest rates rise again, will there be the same demand? If savers could easily achieve above 3% with their money guaranteed, would that outweigh a higher rate with risks and no guarantee?
As our new guide highlights, this is a new market and although some providers have provisions in place to help protect savers, nothing is guaranteed. Whilst there have been no real scandals to tarnish the market yet, there are instances where savers have lost money.
Through our guide we compare Peer to Peer with traditional savings accounts to help better inform savers who may not be fully aware of the associated risks. Some Peer to Peer products may look like savings accounts but in fact they should be considered an investment and those looking to invest may want to look at all types of investments to ensure that what they choose is appropriate to their needs and circumstance.
If you’re thinking about investing in P2P or want to understand if it is suitable for you, then we would always suggest seeking advice from an independent financial adviser. We recommend our sister company The Private Office, a firm of Chartered Financial Planners, offering wealth advice to those with more than £250,000 in investable assets. Call us on 0800 321 3581.