Anne O’Sullivan has kindly written the following guest post for FIRE Dave blog on Linked Finance as an investor (an Irish P2P lending platform)..
Access to funding..
Peer to peer lending, or P2P, as it’s more commonly known is a mechanism for lenders and investors to invest money in businesses that are seeking loans to expand. These platforms aim to solve a major problem facing small businesses: access to funding. At the same time rock ¬bottom interest rates in banks, credit unions are frustrating savers with money to invest. Platforms such as Linked Finance, Flender, Property Bridges in Ireland use technology to provide a mechanism where ordinary people with savings can connect and lend to businesses that need working capital, business loans or stocking loans. These sites are all based in Ireland, but they do not have smartphone apps for consumers to use.
I’ve been using Linked Finance since 2018, when looking for an alternative home for my savings apart from banks, post office savings accounts, credit unions to invest for a short period of time. When I registered with Linked Finance, I knew nothing about FIRE and didn’t know a lot about investing in property, index funds, the stock market to name but a few investment alternatives. I was attracted to P2P lending because it allowed me to invest in businesses in my local community and throughout Ireland where I knew business owners personally, and whose services I could avail of later. Apart from Property Bridges which allows people to invest in property prior to construction, Linked Finance, Flender do not allow for investments in stocks, shares, bitcoin.
Returns on investment from 6% – 17.5%..
On Linked Finance, returns on investment range from 6% to up to 17.5%.. and one can start investing with as little as €50! The interest rates businesses pay to borrow on peer-to-peer platforms is often far higher than the rates charged by traditional banks. In some cases, that might be because a traditional bank does not want to take on these lending risks where they perceive that the businesses are too risky to lend to. Returns are paid monthly, starting from when an investor invests in their first loan. There is an option to re-¬invest these returns or take as cash. The platform deducts it’s fees from any payments lenders receive, and these can be seen on the Summary page after the user has logged in to their accounts.
An option to re-invest your returns in new business loans by autobid exists, so that you can invest a lump sum or invest by direct debit monthly while automatically investing in loans. The term of loans ranges from 12 to 60 months, so it can be good for those who wish to invest in the short term. To date, I’ve been unable to re-invest in every new loan with autobid. The reason I’m not able to enter every loan via Autobid is due to order rotation.
Loan applications filled instantly..
At any time, lenders are able to successfully bid in approximately every 4th loan within the rule of order rotation. The success rate also depends on the size of the loan and the liquidity of the platform. Depending on the size of the queue, with every new loan the rotation continues until all lenders in the queue were given a chance to bid, and then restarts. Linked Finance customer service have advised me that “Please note that the lending market has been hit with a pandemic crisis and all financial providers are experiencing a general decline in total credit enquiries. That is a constant since early-March 2020, and we cannot predict how the market will develop in the next few months.” Having said that, the platform has sent me e-mails where loans have failed to reach the number of investors required to fund loans. This hasn’t happened to me in over 6 months now. In the early days of COVID, a lot of businesses were applying for loans to tide them over so they could continue trading. To date in 2021, very few business have been applying for loans, and these loan applications get filled up very quickly because Linked Finance is the biggest P2P platform based in Ireland.
Since January 2021, a change was introduced to the Linked Finance platform in relation to available cash balances on lenders accounts. As deposit interest rates across the Eurozone are at a low, this has led to the banks imposing negative interest rates and charging business account holders to hold cash on deposit. Prior to 2021, Linked Finance absorbed the charges without passing these fees onto investors. Because the banks increased these charges over the last few months of 2020, Linked Finance could no longer absorb fees.
From 1st January 2021, any investor who:
a) has not invested in any loans in the past 3 months, or
b) has an available cash balance over €5,000 on the Linked Finance platform (regardless of how often lenders bid on the platform),
will be charged a monthly fee, equivalent to 1.25% per annum, of their available cash balance on the Linked Finance platform. Eligibility for the fee will be assessed on the 1st of each month, after which the fee will be calculated daily and then deducted from lenders accounts on the last calendar day of each month.
Any cash lenders have invested in a live loan will not accrue these charges.
Lenders will be able to monitor this Balance Fee charge by looking at the Available Cash panel in their Linked Finance accounts.
Monitor your available cash..
To avoid this charge, or significantly reduce the charge deducted, lenders should:
Reduce the amount of cash deposits they have on the platform by making a withdrawal. They could make withdrawals free of charge until 31 December 2020. After that date, lenders can make 1 free withdrawal over €250 per month.
Actively monitor the amount of available cash you have on the platform on a regular basis to ensure lenders don’t keep more money on the platform than you need to.
Review their autobid strategy to make sure that you don’t miss out in opportunities to bid on new loans on the platform.
Excellent customer service…
Withdrawals can be requested via lenders Linked Finance lender accounts. I’ve availed of this facility and it worked well, with no issues. To date, I have found customer service with Linked Finance excellent in that they respond to queries quite quickly and they communicate clearly.
Interest on P2P loans is taxed at the highest rate of income tax in Ireland. For many people, that can be as high as 52%! As a lender, you get interest without a tax deduction. Interest earned from any loans on P2P sites qualifies as unearned income for taxation purposes ie. money earned from investments. You will need to show the interest you receive in each tax year on your self-assessment tax returns when reporting the interest to Revenue. To calculate this figure you will be able to download this information from logging into your account (My Account), and use it to help you complete your annual self-assessment tax return.
P2P unregulated in Ireland..
At present, peer-to-peer lending is unregulated in Ireland, and there have been failures of these platforms in other countries such as Grupeer, Lendy. No P2P platform is covered by the Deposit Guarantee Scheme or the Investor Compensation Scheme in Ireland, but all are registered with the Companies Registration Office. The application process for Linked Finance is relatively straightforward in that one needs a form of ID when completing the registration process for the site. The criteria are set out in https://www.linkedfinance.com/start-lending/.
Positive P2P experience overall..
On the whole, I have found P2P lending with Linked Finance a good place to start, when I wanted to invest some money on a short term basis, given that the rates of returns are extremely competitive compared to the banks. I would not recommend this strategy on a long term basis given that P2P is not regulated in Ireland. The following warning is at the very end of the Linked Finance homepage in difficult to read text:
WARNING: Your returns may be lower than expected. Past performance is not indicative of future results. If you lend to businesses on Linked Finance you may lose some or all of the money you invest.
Thank you Anne foir sharing that is a great insight into P2P from your perspective and you do give a balanced view with a good level of detail!
Next, to check out Anne’s FIRE interview with me click here
If anyone has any questions about this blog post contact me here