I had already stopped investing in P2P lending to SMEs (Small to Medium-Size Enterprises) over a year ago. Simply, the return did not outweigh the risk. Unlike bank deposits there is no protection when you invest your money in P2P lending. In shares and their derivatives the return can be quite considerable even though there is a chance you'll lose it all. The percentage return on P2P lending to small businesses is often in single figures, again with the risk of losing it all.
Many businesses borrow from P2P lenders as a last resort, having been turned down by banks as being too high risk. For me to then bailout such a business with a loan with a single digit return made no sense. By the time I began to wind down my investment in SME loans the failure rate was increasing. I got out with a profit and in the nick of time.
Now, I am winding down my loans to individuals. Again, the rates are being squeezed. Not only that but one P2P investment site that I liked to use is constraining the way I can set my own interest rate such that my loans now receive less than 5% return when they used to receive over 6%. All this means the return no longer reflects the risk.
Many P2P lending sites want to become banks. This is good in that lenders will be protected by the FSCS compensation scheme but the returns will be no better than the established banks. Why then bother with the rigmarole of P2P lending when you can leave your money in a High Street bank?
In the future I might return to P2P lending but at the moment P2P is going through a transition period and I don't want to risk my wealth whilst the market adjusts. If a P2P 'bank' gets FSCS accreditation and offers a higher return than a High Street bank then I'll be back. Until then I shall protect my capital by taking my capital out of P2P and parking it elsewhere for a few months.
