Outperforming

In this week's blog, and for our penultimate of 2024, rather than reflecting on current affairs in our sector, we have turned our attention to a recent press release from 4thWay, the world’s first rating agency and investment indices for the peer-to-peer industry. In a numbers-driven piece, they have successfully illustrated the success story of the last 10 years in the p2p market, and we only thought it fitting to comment on some of the findings and draw our conclusions.

The 4th Ways Peer-to-Peer and Direct Lending Index (PADL Index) was launched in August 2024. It enables investors to compare long-run returns to shares and other asset classes by averaging all the rates available across a basket of constituent products, roughly representing half of the UK P2P lending market. The index nuances this in the manner of bond indices by factoring in intra-loan events and default interest paid to investors to create verifiable and trackable indices.

Over the past decade, peer-to-peer (P2P) and online direct lending have proven to be significantly more rewarding paths for investors looking to grow their wealth than traditional savings accounts like Cash ISAs. With returns that outpaced inflation and outperformed cash savings by a wide margin, this investment has become an appealing alternative for those seeking higher yields without venturing into overly complex or high-risk territories.

Looking more closely at the report, over the past ten years, investors in P2P lending and other forms of online direct lending have enjoyed an average annual return of 7.30% after accounting for costs and losses, according to the 4thWay P2P And Direct Lending Index (PADL). This translates into a remarkable doubling of their capital. For example, £10,000 invested in P2P lending in 2014 would have grown to £20,468 by 2024. In stark contrast, the same £10,000 invested in a Cash ISA would have yielded only £11,956, a modest gain of 19.6%.

This disparity highlights the transformative power of compounding at higher rates of return, which sits at the heart of our product. While Cash ISAs are widely regarded as a safe and accessible option for savers, their returns have been insufficient to keep pace with inflation over the past decade. Inflation, the silent destroyer of wealth, has been a significant factor during this period. Cash ISA savers have struggled to keep up, with real returns (adjusted for inflation) falling by 16.9% over the last ten years. While savers may have seen their account balances grow nominally, the purchasing power of their savings has diminished, leaving them worse off in real terms.

Conversely, online lenders have kept up with inflation and outperformed it by an impressive 42.5%. This means that investors in P2P and direct lending platforms have enjoyed both capital growth and protection against the depreciating effects of inflation—a crucial advantage in today’s economic landscape.

One factor that levels the playing field between these two options is their shared tax-free status within tax wrappers. IFISA and Cash ISAs offer tax-free returns, incentivising savers and investors to maximise contributions. However, given the stark contrast in returns, the tax-free benefit significantly amplifies the appeal of the IFISA. By avoiding taxes on their higher returns, P2P IFISA investors can retain more of their earnings, further accelerating the growth of their investments.

So, how have we achieved this? P2P lending platforms act as intermediaries, connecting individual investors with borrowers who need funds. By providing an alternative to top-heavy traditional financial institutions, platforms like ours can offer lenders higher interest rates and lower borrowing costs to borrowers.

The underperformance of Cash ISAs can largely be attributed to the prolonged period of low interest rates following the global financial crisis. Central banks worldwide kept rates at historic lows to stimulate economic growth, translating into minimal returns for savers. While interest rates have started to rise over the last few years, the pace has been slow, and the cumulative impact over the decade remains underwhelming for savers.

While P2P lending's performance over the past decade has been impressive, it’s important to approach it as part of a diversified investment strategy. Diversification across asset classes, such as stocks, bonds, real estate, and P2P lending, can help mitigate risks while optimising returns. Including P2P lending in a portfolio offers exposure to an asset class that behaves differently from traditional investments, providing additional balance and stability.

As we move into the future, the appeal of P2P lending and online direct lending will likely remain strong, particularly for investors seeking higher returns in a low-yield environment as we enter a more dovish rate environment. However, investors must conduct due diligence, carefully selecting platforms with a proven track record, robust risk management practices, and transparent operations. This is why we are proud of our track record, which meets these standards and has resulted in our exceptional classification from 4th Way.

The past decade has clearly shown that P2P lending and online direct lending can deliver significantly higher returns than traditional savings options like Cash ISAs. With returns that have doubled investors’ money and outpaced inflation, these platforms represent a compelling alternative for those seeking to grow their wealth. The data on offer here underscores the importance of considering alternative investments like P2P lending to achieve meaningful financial growth. Investors can secure a brighter financial future by embracing a diversified approach and taking advantage of innovative financial products.

Invest & Fund has returned over £200 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.

To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com

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