Richard Litchfield, Head of Operations at Lending Works, discusses how peer-to-peer lending can offer a more ethical alternative to traditional forms of investment, and shares his insider tips for maximising your returns.
As the saying goes, ‘Money is the root of all evil.’ However, investing your cash (and seeing returns on your investment) doesn’t have to be a harmful process as long as you’re careful to invest using an ethical scheme.
If you’ve got some money set aside and you’re considering investing, peer-to-peer lending could be the route for you. This model allows you to avoid the big banks and building societies — with which many customers have become disillusioned – and instead allows you to lend money directly to sensible borrowers. Plus, typical returns can be up to 6% compared to savings rates offered by the major banks.
In this article, I’ll be talking about how peer-to-peer lending works, how it can offer a more ethical model than traditional investment strategies, and how you can boost your potential returns.
How does peer-to-peer lending work?
Before we talk about ethical lending in more depth, it will help to get to grips with exactly how the system works. Peer-to-peer lending uses an online platform to connect investors with creditworthy borrowers who want to get a better rate on their personal loan. This effectively cuts out the middleman, so both the lender and the borrower can enjoy better rates.
As an investor, you’ll have complete control over your loans. You can start investing with as little as £10 and you’ll be given a choice of investment terms, usually lasting between 1–5 years. Then, all you need to do is sit back and wait for the loan(s) to be repaid to you with interest.
Whilst there are risks involved in any investment, the risks associated with peer-to-peer lending are much lower than alternatives such as stocks and shares. Borrowers are carefully vetted to ensure their creditworthiness, and your investment is usually diversified across lots of different loans, which means that if one of your borrowers defaults, your losses will be cushioned. Some platforms will also allow you to select who you lend to.
Is peer-to-peer more ethical than using a bank?
Traditional bonds and savings accounts may be convenient and low-risk, but the practices of some major banks have been brought into question, as exemplified by the plethora of scandals that have hit the headlines over the past 10 years. When you invest with a big multinational bank, you’re given little control over what they do with your money. They may invest in companies whose practices are environmentally damaging, or in businesses that test on animals or are involved in trading fur. Other recent scandals include HSBC’s £1.4bn fine after it was discovered Mexican drug cartels were taking advantage of the bank’s lax rules to launder money. (Telegraph).
The way that banks treat customers is also an ethical issue for many people. Many major banks have been embroiled in mis-selling scandals, such as PPI, in which bank staff are given performance-related pay to encourage them to sell financial products to people who either didn’t need them or couldn’t afford them, which can cause customers serious financial difficulty further down the line.
Of course, not all banks and building societies are involved in such practices; however, there’s no way for the customer to guarantee that their legacy bank will not be involved, or at least complicit, in a number of unethical practices.
You’ll be helping others achieve their goals
When you invest in peer-to-peer lending, you’ll be helping to provide people with an efficient, low-cost loan. Borrowers may be looking for a personal loan for a number of reasons — such as buying a car, making home improvements, or getting married — but may not be able to afford the higher interest rates offered by banks and building societies.
Because peer-to-peer lending essentially cuts out the middleman, both investors and borrowers can access better rates. So, when you invest using peer-to-peer lending, you’ll have the satisfaction of knowing that your money is out there helping people like you achieve their goals.
How much money can you make using peer-to-peer lending?
Assuming your investment is successfully repaid, you could expect to see returns as high as 6% per annum, depending on the length of the loan term. If you’re looking to maximise your investments, I would always recommend going for the longest term you can afford.
And, while you’ll have the option to draw down your earnings, it’s a smarter move to opt to reinvest the repayments you receive. By keeping your money invested, you can be sure that it’s always out there working for you, instead of sitting losing value in your account.
Looking to start an investment portfolio, but worried about the ethical consequences? Peer-to-peer lending could be the strategy you’re looking for. Take my advice on board, and you’ll soon be able to enjoy competitive returns without worrying about the impact your investment might have on the wider world.