With bank savings offering low interest rates, investors are investing their money in bonds and peer-to-peer (P2P) loans as an alternative option. Bonds and P2P loans are not covered by the Financial Services Compensation Scheme (FSCS), but investors can earn 5% to 7% interest yearly. P2P loans and bonds can provide investors with a consistent income.
Bonds and P2P loans require investors to invest a lump sum of money for a set period and are paid on an ‘interest only’ basis. In other words, investors lend money to borrowers for a set time and promise to repay it with a percentage of interest.
Bond returns may differ depending on whether investors purchase them individually or through a mixed ‘bond fund.’ Bonds have become unpopular in recent years due to low interest rates. Only a few exceptional bonds remain, such as Wasps Rugby Club, which offers a 6.5% interest rate with a 7-year investment period.
On the other hand, P2P lending allows investors to lend to businesses or individuals. P2P eliminates the need for banks by connecting lenders and borrowers through platforms such as Hap2py Penny.
The main distinction between bonds & P2P loans is the amount of money investors can invest and how simple it is to manage. P2P typically offers a lower initial investment as compared to bonds. When it comes to the ‘hands-on’ approach, bonds usually require the services of a stockbroker or bank, whereas P2P platforms allow investors to open an account, transfer the money, and get started.
Bonds are probably more familiar to investors than P2P loans, but they are different. The key is to look for P2P services that manage and structure using the tried-and-true approach. It entails looking for companies with a proven track record and promising prospects.
To whom do investors lend?
Depending on the investor’s risk tolerance and diversification strategy, P2P loans involve lending to worthy small and medium-sized businesses, individual borrowers, commercial property renters, or landlords.
Investors may go up a notch by lending capital to fund property developments or lending to people who are short on cash but have luxury assets such as yachts and artwork. It may even imply lending to people or business owners who are barely creditworthy in exchange for higher interest rates. In addition, bonds are typically loans to creditworthy large corporations or governments.
Transparency & Disclosure Policy
Another difference between bonds and P2P loans is the lack of transparency. Many P2P lending platforms have an entire loan history and records, allowing investors to review and analyse how each borrower’s historical loans performed. They may even make the information public.
It is an unprecedented amount of information, and this enormous knowledge advantage significantly reduces the risks for investors to lend out their money. Many P2P lending platforms also allow investors to speak directly with potential borrowers.
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