Why Peer-to-Peer lending and IFISA are good investments?

Peer-to-peer lending is non-conventional. No institution has financial involvement. It’s a lending deal between a lender and a borrower. In 2005, Zopa, a UK-based company, first started providing peer-to-peer investment services. To make Peer-to-Peer investment tax-free, one needs to invest in an innovative finance ISA(IFIS). Innovative Finance ISA(IFISA) was first introduced on 6 April 2016.

But due to the global recession of 2008-2009, it couldn’t get any recognition. And after that, it grew exponentially. Now, most investors take advantage of it for personal needs, establishing and maintaining small businesses, and crowdfunding for mega projects.

The investor does not use any intermediary. So, they do not need to pay the borrower fees for finding, registration, legal, and others. Thus, the borrower gets maximum returns.

This means that the lender needs to sign up and make his money available for lending. This online nature makes it easily accessible for all potential investors and facilitates speedy investment application submission.

Upon approval, the investor can transfer his money to the platform and make it available for all the prospective borrowers. This would take hardly one to two days which is comparatively quite fast concerning other mainstream traditional banks and credit unions’ lending process. 

These Investment platforms allow investors to lend their money to any borrower of their choice. Additionally, investors and borrowers can mutually decide terms and conditions. Furthermore, such platforms provide investors with financial management services using which an investor can further reinvest his returns, thus maximizes his profits.

The interest earned from Peer-to-Peer investments usually adds up to the investor’s salary or self-employed income. And this makes the investor liable to pay income tax after you hit a certain income. For example, in the UK, an investor could pay up to 20% to 45% tax depending upon the tax scale he falls into.

Innovative Finance ISA – IFISA

For tax-free Peer-to-Peer investment, one needs to invest in an innovative finance ISA(IFIS). Finance IFISA was first introduced on 6 April 2016.

IFISA was made for peer-to-peer lending. It lets an investor earn interest tax-free. This shows that the government will not tax the interest earned under IFISA. It also will not count into your personal saving allowance.

However, there is a ceiling limit to your interest, and you can contribute each year to IFISA. This annual IFISA limit for the year 2020 has been set to £20,000. This means that you can’t invest your interest in worth more than £20,000 for 2020. You can invest your interest in the amount mentioned above in one IFISA. Or, you can spread it across different IFISAs.

Furthermore, one could transfer his existing innovative finance ISA into another IFISA as well. However, the next year’s annual saving allowance will not show your previous year’s savings.

Thus, you can increase your total investments, and this will allow you to maximize your returns. Interest rates for IFISA are comparatively higher than other ISAs, which means you can earn more interest.

Many providers are offering IFIS in the marketplace. However, the Financial Conduct Authority (FCA), UK, must authorize all these providers.

FCA allows all these providers to offer loans to businesses, consumers, and developments. They must follow the set rules and regulations. And all the returns are tax-free under the wrapper of IFISA.

Under IFISA, an investor enjoys more diversification. Since this market is growing each day, an investor may enjoy more investment options.

Additionally, FCA ensures the protection of the rights of both the lender and the borrower. Furthermore, FCA ensures that providers fully comply with the rules and regulations. They must not compromise the quality of the financial products. In case of any violations, the violator will face legal action under FCA legal framework.

Peer-to-Peer lending is lucrative, easily accessible, flexible, and speedy than other mainstream banks and credit unions. One can earn returns weekly or monthly and if desired, can further reinvest them and maximize his profits.

By contrast, these profits could make the investor pay tax. This happens after they earn a certain income threshold. Consequently, paying these taxes, one may not earn expected profits. IFISA is specifically designed to entertain Peer-to-Peer investors.

Under its tax-free wrapper, up to £20,000, you are not liable to pay taxes anymore. If you are interested in Peer-to-Peer investment, be sure to subscribe to the IFISA policy.

Also Read: 4 Best Types Of Fintech – How Does Fintech Make Money?


Image by Steve Buissinne