In the first half of this year, peer-to-peer lending passed a fresh milestone in the UK. According to the Peer-to-Peer Finance Association, online platforms handled new loans worth £500m over the period, with over 66,000 individuals offering loans through them. While cash and stocks and shares still attract the vast bulk of investor money, those looking for an alternative way to save will find that returns through peer-to-peer platforms like Zopa can be very attractive – certainly compared to banks.
And many won’t just be saving for themselves, but for their children too. Having a child has never been so expensive. Figures from Fidelity show that the cost of raising a child from birth to 21 has now hit £218,024, with the cost of education alone a staggering £71,780. And this doesn’t even cover other ambitions you might have, like accumulating capital to help with a house deposit. So how could peer-to-peer help you meet your goals?
One of the most popular ways to save for your child over the long term is via the Junior Isa (Jisa). Allowing £4,000 to be invested each year, the tax free wrapper is an effective way to build up a lump sum that your child can access at 18, making it ideal for university costs.
At present, however, peer-to-peer loans cannot be held in a Jisa, and income is not sheltered from the taxman. But this is set to change. Earlier this year, the chancellor announced that peer-to-peer lending will soon be eligible to be included within the new Isa (Nisa) and the Jisa, with a public consultation to be held later this year. Chelsea Financial Services’s Darius McDermott says that the tax advantages of Isa products (paying no income tax on returns) would make peer-to-peer lending a “more attractive and conventional way” of saving.
But even outside the wrapper, peer-to-peer investing could have benefits that the Jisa doesn’t. For starters, a Jisa becomes the child’s property on their eighteenth birthday – not ideal if there are plans for extended celebrations. Furthermore, the money cannot be accessed until that point. Not a problem if you’re thinking about weddings or house deposits. But as Hargreaves Lansdown’s Danny Cox says, that makes it an unsuitable vehicle when it comes to saving for school fees or childcare. He suggests matching the maturity dates of a series of peer-to-peer investments to the dates when school fees need to be paid, “producing cash flow at the perfect time”. Given the attractive returns peer-to-peer can offer, often above 5 per cent annually, even a modest investment could leave you quids in, especially if you reinvest interest payments.
But it is also important to read the small print. Although established peer-to-peer platforms allow you to sell on your loans to other lenders if you need to access capital quickly, McDermott points out that each operator will have different rules, and your money might be locked away for months, or longer.
Of course, peer-to-peer is also riskier than cash, as borrowers could default on their repayments, reminds Cox. And as it stands, peer-to-peer investments don’t qualify for the Financial Services Compensation Scheme, which covers up to £85,000 of your cash, should a bank or building society go bust. But in the event that one or more borrowers can’t meet their repayments, peer-to-peer lending platforms do have their own provision funds in place. Moreover, default rates have been very low in recent years – often under 1 per cent at leading platforms. So for savers looking for an alternative option to widen how they save for their children, peer-to-peer is certainly an option worth considering.