This article first appeared on our Squirrel Money blog. With interest rates (and rental yields) trending ever lower the opportunity to get a return of over 8.00% p.a. should be taken seriously. I don't think these rates will last long. As investors get to understand P2P better, and in particular how Loan Shield protects their investment, then these yields will come down. At the moment, you can invest in 5 year loans with a yield of 8.50% - 9.0%. BUT 5-year term is a long time, right? Yes and no. Remember that you are investing in loans that should fully repay over their term. You receive a mixture of principal and interest back as a regular repayment each month for the term of the loan. It's basically like an annuity over 5 years. That could be a very good investment for retirees looking for regular income type products. The graph below shows the repayment profile of a 5-year loan. 32% of the principal is repaid in the first two years so even with a "5 year" investment you can access some of your funds. If you invest in a mixture of different term loans then you can tailor how your cash flow looks and make sure you always have regular income.
We use a Reserve Fund (Loan Shield) that is provisioned to cover credit losses that result from borrowers missing payments or defaulting on their loans. So long as the Reserve Fund has sufficient funds available, it means investors will consistently get their regular monthly repayment - creating reliable income. In the unlikely event that the Reserve Fund runs out of funds then it will be replenished as much as possible by shaving the interest rate that investors receive with the trustee able to re-direct up to 100% of the investor interest payments into the Reserve Fund. That way losses are ultimately socialised across all investors before any investor principle is put at risk. It’s the fairest and most efficient system to maximise the benefit for all investors. It also keeps investing simple, so you don’t need to spend hours assessing the credit risk of every loan. We're sure you have better things to do with your time!