Crowdfunding And Peer-To-Peer For SIPP And SSAS
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Peer-to-peer lending will be worth $1 trillion each year by 2025, predicts a leading venture capital firm
If you've ever considered peer-to-peer lending or crowdfunding, or if you’ve already done it either with cash or via your SIPP, download the Peer-To-Peer Lending Report.
Lending Will Be Undertaken By Many Peer-To-Peer Companies
On the face of it, $1 trillion each year sounds like a huge sum. It’s certainly a big increase in the size of the market which is expected to be £1.6 Billion In 2014.
However, it fits nicely into context when you consider that lending generated by banks, credit card companies and more traditional lending institutions will amount to $3.2 trillion.
Five Reasons Consumer Lending Is Ripe For Disruption
- Since the 2008 credit crunch, banks’ compliance costs have rocketed. They’re required to increase and improve their capital holdings and as a result, they have less money to lend increasing the need for alternative lenders.
- Maintaining retail operations increases costs for bricks-and-mortar banks but not for internet-based lenders.
- Investors, such as SIPP holders, are hungry for higher yields over shorter periods of time.
- New data sources present opportunities for better underwriting.
- Few, if any, current banking customers feel loyalty to their bank or existing lender.
The primary reason for the massive growth in peer-to-peer lending comes from the efficiency savings created via online trading. Typical peer-to-peer lenders have a cost advantage over traditional financial institutions of up to 4 per cent. These savings are mainly due to the horrendous costs associated with owning and maintaining branches, and with regulatory expenses.
A 4 per cent advantage is a huge incentive to move lending from a less efficient market to a more efficient one. Quite simply, if you’re faced with the decision to borrow at 8 per cent or 4 per cent, you’d borrow at 4 per cent every time.
It’s this major differential that underlies the reason why a huge amount of venture capital is already pouring into the market. In the above example, you'd still be happy paying 6 per cent for your money compared with 8 per cent from the banks, with the venture capitalists profiting from the 2 per cent difference. The net result is cheaper loans to borrowers compared to bank lending, and a huge growth potential for venture capitalists expanding the market for everyone.
Providing peer-to-peer lenders don’t exploit this position, and they focus carefully on regulatory issues and security measures, peer-to-peer lending is certain to cease a sizeable stake in the lending market.
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Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).
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Crowdfunding And Peer-To-Peer Risk Warning
When a platform has been assessed and approved by a SIPP or SSAS operator, this does not imply that any loan or investment opportunity is endorsed in any way. A SIPP or SSAS operator's due diligence review is limited to ensuring the processes and procedures of the platform are in line with both FCA and HMRC principles. It's entirely your responsibility for carrying out your own due diligence on any loan or investment opportunity before agreeing to lend or invest your pension money on a platform. As a SIPP or SSAS operator will continually review platforms from a regulatory perspective, it's possible for a platform to become 'unapproved' if something changes.
With peer-to-peer lending, your capital is at risk if you lend to individuals and businesses. You may lose some or all of the capital lent if the borrower defaults and is unable to meet its liabilities. Historic loan default rates are not necessarily indicative of future default rates. In addition, lending is an illiquid investment, which means you may not be able to access the capital you lend for the duration of the loan period, even if the platform offers a secondary market. Investing in any business involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdfunding is generally targeted at investors who are sufficiently sophisticated to understand the risks and make their own investment decisions, based on their knowledge, experience and financial capacity. Neither crowdfunding nor peer-to-peer lending is covered by the Financial Services Compensation Scheme. The tax treatment of your investment is dependent on your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of crowdfunding investment or peer-to-peer lending, you should consult a suitably qualified independent financial adviser.