Peer-to-peer lending sites: MSE guide discussion

grey_gym_sock

Caprylate wrote: »

Have I misunderstood the post a few posts up?

yes

You get the interest paid gross, but due to being P2P you don't have to pay any income tax on it?

you get it gross, and then you have to pay any income tax due. (though if your total income, of all kinds, is under your personal allowance, no tax will be due.)

agent69

JDB87 wrote: »

At the moment I'm most drawn to Ratesetters because it seems the least risky and the savings accounts on offer at the moment barely seem worth bothering with.

If it was me (and I trusted the girlfriend) I would try to get the money into an ISA asap. £11k allowance immediately and the same again in April. If you decide to try P2P (or P2B) the following info about the biggest players might help;

• Zopa and Ratesetter are lower risk (because of the provision fund) but only pay just over 4%.
• Funding circle have lots mainly small business loans at between 6.3% and 11.5%. The is no provision fund and little assest security, so defaults are an issue
• Thin Cats has secured business loans at around 10%, if you have £1k a time to invest.

Your tax status is key, because losses are not offset against tax. For example if you are a higher rate tax payer with a C- band loan at FC you get 10.5% gross after the FC fee. You then pay 40% tax before the projected 5.5% default rate is factored in. So the 11.5% starting rate ends up at less than 2% by the time it get to your pocket.

Currently I am with FC, TC and Assetz, but concentrating on loans with good asset security.

agent69

rwgray wrote: »

That's £1,000 per company invested in, so you need at least £50k to achieve 2% diversification.

Not so

It's minimum £1,000 per loan. If you lend to one of the Thin Cats lending consortiums (typically £300k pot) you pay £1,000 and the money is invested into at least 7 different loans.

JamesMc69

Agent69 i agree the key is looking for the correct company to back, ideally one with good security. When i invest via Funding Circle or Thin Cats I always avoid the smaller firms looking for "expansion capital" this seems a high risk investment to me, perhaps more suitable for something like Seedrs.com or crowdcube.com, the sites specialising in venture capital.

Another option which i have also started using is abundancegeneration.com They specialise in allowing access to renewable energy investments but specifically in the company that actually own and operate the generating asset - wind or solar to date. The risk is therefore pretty low, they also offer a competitive 6-9% IRR return, which is treated as a dividend so good from a tax perspective..

jamesd

Caprylate wrote: »

Have I misunderstood the post a few posts up? You get the interest paid gross, but due to being P2P you don't have to pay any income tax on it?

You must tell HMRC. They will adjust your tax code to collect the tax you owe. They will normally use the most recent year as an estimate for the current year and set the tax code to collect the right amount of tax for that estimated untaxed income. You can tell them if another estimate is better and they will use that.

The P2P companies provide mandatory interest reports to HMRC about how much interest was paid to each person, using your real name and contact details. If you don't tell HMRC yourself you're just inviting a tax investigation.

If you haven't been telling HMRC it's not a problem to just tell them about a few past years and ask them to correct the tax calculations for those years. No big drama involved for the sorts of money normally involved in P2P. Phone or letter works fine, just get on with it and forget the bigger future hassle.

mikb

Caprylate wrote: »

Have I misunderstood the post a few posts up? You get the interest paid gross, but due to being P2P you don't have to pay any income tax on it?

I was saying that specifically in response to the scenario given, of someone who is UNDER the threshold

Don't think you're going to get out of paying tax just because it's P2P!

grumpycrab

For those considering peer-peer lenders. I've tried the 3 major lenders and my experience was the opposite of Martin's as reported in the Telegraph
www.telegraph.co.uk/finance/personalfinance/savings/10400668/Martin-Lewis-What-I-earned-from-peer-to-peer-savings.html (strangely, comments don't appear to have been enabled on this article?)

I've had a couple of defaults with FundingCircle, one for quite a large amount. This was partly due to my misunderstanding and partly due to FundingCircles default exposure values which were higher than I realised a couple of years ago (The default exposure values have since been lowered.)

jamesd

Thanks for mentioning that. There are some substantial problems in his description of the Rapid Return process at Zopa as 'the not-so “Rapid Return” system takes 3-5 days to get you the cash, and costs an additional 1pc fee'.

In fact:

1. The fee is 1% but you also lose enough capital to compensate the buyer for the difference in interest rates between what you lent at and what the market interest rate is at the time of the sale. In a dropping interest rate market this extra is nothing. In a rising market you can suffer a substantial capital loss - a doubling of rates could cost you half of your capital. This is the same general interest rate risk issue as affects the market in government and corporate bonds at the moment. the result is that in effect it can become unreasonably expensive to sell, leaving you locked in until the normal end of the loan.

2. You can't sell any loan where there has been even one late payment, let alone those where there has been an arrangement. This means that you may find that all of your profit is locked up in these past late payment loans and those with non-default payment arrangements if not covered by the safeguard fund. This is an event that is more likely as interest rates drop but which also depends on the mixture of lending to markets with different bad debt rates and your actual experience of bad debt. You will get the money out eventually, though.

There's another consideration with Zopa for some: the Safeguard charge is a non-refundable fee and the combination of that and Zopa's fee can be in excess of £1,000, which is added to the loan with interest to pay on it. Repay in a few months or even a year and that is a massive increase in the effective APR paid by the borrower. The fee depends on amount borrowed, market borrowed from and how much Zopa sets its own cut to. Because of the very close resemblance to this and lump sum PPI the new Zopa system fails my investment ethics standards and I no longer use the Zopa system for any new lending: I regard lump sum PPI and close equivalents as unethical and a failure to treat borrowers fairly.

JamesMc69

One thing i have never really been able to fathom - is why different crowdfunding / p2p platforms treat tax differently, surely they should all treat it the same?

an example is fundingcircle.com who pays its returns Gross, while, abundancegeneration.com, on its interests bearing Debentures, deducts tax at source. (also has debentures paying dividends)

Any thoughts?

grey_gym_sock

well, abundance generation isn't p2p: it's investing in debentures issued by companies (who are running specific renewable energy projects). the legal form will determine whether tax is deducted at source.