Peer-to-peer lending is the newest entrant on the Irish investment scene. Should you put your money in it? And if so, what part does P2P have in your wider portfolio?
Moneycube examines your options.
Before we start, a word of warning. Peer-to-peer lending is not regulated in Ireland, and Moneycube doesn’t provide advice on it.
This is purely an overview of the sector to help you plan your wider investments.
In finance, risk and return are connected, so if you are investing in high-return projects, it’s likely you’re also taking a high level of risk. As an individual lender to businesses or projects, there is clearly the chance that you won’t be paid back when you lend peer-to-peer.
Who is out there?
The original peer-to-peer player in Ireland is Linked Finance. It’s been open for business since 2013. And as of October 2019, Linked Finance says it has lent over €114 million to Irish businesses, across 2,338 loans.
Linked Finance has been joined by Flender in more recent years, with both marketplaces offering people the opportunity to lend their money to Irish businesses, with interest payments while the money is lent.
More recently, peer-to-peer property loans have emerged in Ireland, with the appearance of Property Bridges. With this lending platform, you’re helping to finance a property development project rather than a business loan.
How do they work?
In general, P2P lenders all work in a similar way: they enable individuals to lend money through their platform, and match it to businesses or property developments which need loans. Some providers also have access to other funding so that a portion of the loan can definitely be financed.
That’s an important aspect of P2P lending: you are lending your money, not investing it. That means your return comes in the form of interest.
And as we’ll see, that has some tax implications you need to consider when lending you money on a peer-to-peer platform.
How much can I lend? And how much might I get back?
Both Linked Finance and Flender offer the opportunity for investors to lend as little as €50 to businesses who are seeking loans on their platform.
Flender dangles the possibility of 10% or higher interest, while Linked Finance mentions that you can “earn up to 17.5%”. Flender states you can lend as much as €250,000 on a single loan.
Over at Property Bridges, you can invest from €500.
So why would I lend peer-to-peer in Ireland?
Most lenders like three main aspects of peer-to-peer lending in Ireland.
- Fast returns: P2P offers the opportunity to see interest payments come in within a matter of months.
- Transparency: the peer-to-peer lenders operate online, and there’s a sense of visibility over your money – and the charges you’re paying.
- It’s local: P2P projects often offer the chance to support local property developments, and local businesses. That feels like a good thing to do, and helps you stay close to your money
All of these reasons are good in themselves. But before you jump in, it’s worth weighing up some of the potential downsides of lending your money on peer-to-peer platforms in Ireland.
Risks of peer-to-peer lending in Ireland
There are several key risks and downsides to lending your money on P2P platforms in Ireland.
- Taxation: as we’ve mentioned, interest on P2P loans is taxed at your highest rate of income tax in Ireland. For many people, that can be as high as 52%! You’ll also have to report it to Revenue using a tax return – if you’re not already a self-assessed taxpayer, that creates a lot of new admin.
- High returns can mean high risks. In finance, risk and return are connected. The interest rates businesses pay to borrow on peer-to-peer platforms is often far higher than the rates charged by traditional banks. In some cases, that might be because a traditional bank does not want to take on these lending risks. So ask yourself what risks you’re taking with your money as you lend it to projects with high potential returns.
May 2020 update: Post Covid-19, we believe the risks are heightened for P2P lending. Many P2P loans are to small and medium-sized business which are heavily impacted by lockdown restrictions. They face reduced cashflow in 2020 (affecting their ability to repay loans), as well as increased investment costs and lower revenues over the medium term in order to support social distancing measures.
- Peer-to-peer lending is unregulated in Ireland. That’s not necessarily a bad thing, but it means you don’t have the consumer protections that exist with a business regulated by the Central Bank of Ireland such as Moneycube – and there have been high-profile failures in the sector in other countries.
- It’s a small market. There’s no getting away from the fact that Ireland is a small market. And because you’re lending to specific businesses, your investment lacks diversification.
So, should I ‘invest’ in P2P lending in Ireland?
Several peer-to-peer lenders in Ireland offers the possibility of strong returns, transparent costs, and a slick online service. Against that, it’s unregulated, can be high-tax, and high-risk.
For sure, it has a place in some Irish investors’ portfolios. But it’s not for the faint-hearted. If you’re looking to put your money to work over the medium term, whether in a lump sum or a regular investment, we believe your plan should be diversified, regulated, risk-managed, and optimised for tax.
That’s why at Moneycube, we believe that the core of most people’s long-term investment strategy should be professionally managed, highly-diversified investment funds.
P2P loans could well add some jam on top to your investment returns – but for Moneycube, the sector has some way to go before investors should devote large portions of their wealth to it. We’ll be sticking to the tried-and-tested approach of helping investors put their money in diversified, professionally managed investment funds.