Thursday 18 December 2014

Peer-to-peer lending brings higher returns but with risks

Published 22/06/2014 | 02:30

RULES OF THE GAME: The Oculus Rift developers started with crowdfunding — but sold up for billions to Facebook
RULES OF THE GAME: The Oculus Rift developers started with crowdfunding — but sold up for billions to Facebook

PEOPLE with money on deposit in banks may be tempted to take their hard-earned savings and put some into a crowd-funding project.

Returns of as high as 25 per cent are promised. Tempting, yes, but also high risk.

Crowd-funding, including peer-to-peer lending, involves lending money to, or investing in, a company or project.

This kind of lending is getting very popular and even the European Central Bank has promoted the concept, especially as a way to fund start-ups.

However, the Central Bank has warned investors that crowd-funding and peer-to-peer lending is not regulated and is high risk.

It works a bit like a matchmaking service, except it is online.

You are not looking for a partner, you are looking for a good match for your funds.

That means a business that will repay the loan on time and pay you a handsome reward in return.

Online intermediaries facilitate the matchmaking element of the transaction, allowing you to allocate your funds to a borrower who needs the money to fund some element of their business.

The online platform handles the collecting of monthly repayments. In return, the online platform will take a fee on all the lending you do.

Take Moneybush.net. It says it matches businesses seeking access to finance with savers looking for a decent return on their money.

So far it has seen €1m advanced to 15 projects.

Moneybush says investors can earn annual returns of up to 25 per cent. Moneybush.net charges a 5 per cent finder's fee to the business being funded, and 10 per cent of the return to the investor once the project is completed and the investors are paid off.

LinkedFinance takes a fee of 1.2 per cent of the amount you lend out. So, if you lend €10,000 over a year, it will take €120.

But the Central Bank has warned that crowd-funding, and peer-to-peer lending, is not regulated in this country.

This means that the Central Bank's codes of conduct and protections do not apply to crowd-funding platforms.

Client asset rules do not apply, and the State deposit guarantee scheme and the Investor Compensation Fund do not cover crowd-funding schemes.

And the financial services ombudsman process does not apply in complaints about crowd-funding, and peer-to-peer lending.

The Central Bank said investors risk losing some, or even all, of their money.

And even if the business being invested in succeeds, the return could be less than expected.

It is certainly an investment area worth looking at – but just make sure that you are aware of all the risks.

Twitter: @Cweston _Indo

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