The coronavirus epidemic has led to a rise in financial uncertainty and this has caused thousands of investors using peer-to-peer investments to withdraw their money early.
Peer-to-peer investing has grown significant momentum in recent years, allowing investors to earn rates of up to 15% per annum by investing in a pool of personal and business loans.
Companies such as Zopa and Ratesetter act as middlemen between the borrowers and the investors, earning a profit margin by acting as the introducer.
However, the financial uncertainty surrounding the coronavirus has predicted a number of customer defaults and investors have been quick to withdraw money, also to safeguard their own personal losses through other investments and employment.
Can you take out your money when using peer-to-peer investments?
Yes, most peer-to-peer lenders offer an ‘easy withdrawal’ facility, allowing you to log in and request withdrawal of your money at any time.
Your investment is usually passed
onto the next investor and adds to their diversified pool of
investments.
However, investors must know that taking out their money early can reduce their expected rate of return – and they may end up with an amount that is lower than expected.
Equally, for the investor who buys into this loan, they may also be promised a lower rate – and since defaults are rising with coronavirus, this is creating a cause for concern.
Keep your money locked for maximum returns
Typically to earn the highest rates offered through peer-to-peer investments, you need to keep your money locked in for the duration of the loan e.g 12 months
Taking money out early could incur a penalty or reduce your overall return. Plus, to access the high rates offered by peer-to-peer lenders of 12% or 15%, you will ideally need to lend your money to high-risk propositions, typically customers with poorer credit ratings.
However, with a surge in unemployment due the coronavirus, the risk of default is significantly higher than before.
Do lenders have provision funds in place?
Yes, every peer-to-peer lender will have a provision fund in place, which is designed to reimburse investors of any losses.
London-based lender, Fund Ourselves, explains that a portion of interest charged is placed into a provision fund which is used to reimburse any principle losses to the investor. If the customer does not repay after 35 days, the provision fund may buy back the loan, subject to eligibility.
All lenders will have customer service teams and procedures in place to follow up on bad debts, so if the event of losses, these can be reimbursed further down the line.
Peer-to-peer lending is an FCA authorised activity but not part of the financial services compensation scheme.