A squeeze on lending to businesses by banks and poor interest rates paid on savings have fuelled the lend-to-save, peer-to-peer and crowdfunding investment craze.
With plans afoot to allow savers to shelter these investments in tax-friendly Isas before the end of this year, Sally Hamilton investigates whether more people will choose to follow the crowd.
Power to the people: Student Naomi Pyburn has invested across a mixture of loans with varying levels of risk
Lending to friends and family is generally to be avoided but thousands have taken the risk a step further and loan cash to strangers through a new wave investment – peer-to-peer lending.
Known as P2P and lend-to-save, the phenomenon has become a lifeline in the past few years for many savers struggling to find decent returns on their money, not to mention loan-starved companies.
Savers ‘lend’ money to individuals or businesses at a rate they choose, cutting out the middle man of the bank or building society and, as a result, typically earn higher returns.
Demand for the people power of P2P has soared, with funds invested doubling from £666million last year to £1.74billion in 2014, according to a recent report published by innovation charity Nesta and the University of Cambridge.
And if plans materialise to bring at least some of the options under Isas, they should flourish further. Nesta found that 65 per cent of lenders expect to commit more cash to P2P if the lending qualified.
Here, we examine the three main types of P2P – with differing levels of risk. We have graded them from 1 to 3 in ascending order of risk and colour-coded them.
Yellow is lower risk, orange medium risk and red highest risk - there is no green category as all involve the potential for losing some money.