In the past years, Innovative Finance ISAs (IFISAs) has become very popular among the investors that allows them to invest in peer to peer lending and earn tax-free return. An IFISA allows you to lend money to individuals, business and property owners. The lending is carried out on P2P platforms. The maximum limit of an IFISA is £20,000 per tax year. Over time more and more people are getting interested in investing in Innovative Finance ISA. There are so many Innovative Finance ISA providers in the UK, so it may be difficult for you to choose one. All the providers vary in the type of borrowers you are lending to, level of diversification and rate of returns.
Here we are going to enlist four main features that you must look at when choosing an IFISA provider that suits your needs.
- Return On Investment
Various P2P lenders offer different interest rates, i.e. from less than 4% to a maximum of 15%. Every investor wants to opt for a platform that provides a high return rate but keep in mind that a high return rate usually means high risk. Some platforms offer a return rate of 3% that may seem very low, but such platforms can be right for you as there are low risks. Moreover, some platforms secure your IFISA investment against any asset such as property or car. It can protect your money in case a borrower defaults.
- Type Of Loans
There are three main types of loans in which you can invest, including property, consumer and business. Usually, it is suggested to diversify your portfolio among different loan types, but with Innovative Finance ISA, it might be difficult because you can open one account per tax year. Peer to peer lending platforms offer unsecured consumer loans that are used for funding individuals who are in need of emergency financial aids.
If you choose to invest in property loans, then you can have the benefit that such loans are secured against property. In this way, you can protect your investment. However, the level of risk in property loans varies significantly. Lending for the development of a property is different from residential mortgages. If you want to lower the risk, then you should choose buy-to-let lending.
Business loans can be secured or unsecured. These loans are secured against personal guarantee from directors or the business’s assets. The main risk in business loans is that the companies may go bankrupt. Some platforms offer mixtures of loans and you can spread your capital across them. You can receive a return rate from 3-6%.
- Manual Or Automated Lending
There are some peer to peer platforms that provide automated lending features. In automated lending, you just pay the amount you want to invest, and it is automatically spread among various types of loans. Other platforms offer manual lending in which you can select the borrowers to whom you want to lend money. However, to choose a borrower manually, you must have enough time and experience to understand the loan terms and understand the loan terms.
In contrast, when you choose automated lending, you should understand how loan diversification works and what are the risks associated with peer to peer lending. Also, bear in mind that while choosing manual borrowers, do not put your money in a small number of loans. This is not how good, or safe lending works.
- Track Record
Most of the experts recommend that you choose a platform with an experience of a few years to access its track record. Peer to peer platforms are usually transparent about their credit criteria, lending performance, and level of defaults, specifically if they are members of peer to peer finance association.
If you want to invest in consumer loans, it is preferable to choose a borrower who is over 21 years, has a good credit score, a few outstanding debts and sensible earnings. In the case of buy-to-let mortgage lending, make sure that Innovative Finance ISA provider focuses on experienced landlords with an average rent of 1.5 times more than monthly mortgage payments and a maximum loan-to-value of about 75%. It is good to assess the platform’s level of experience.
If you want to invest your money in unsecured loans, you must see that the platform has experienced underwriters as well as credit risk experts, specifically in the loan types that the platform offers. For secured business loans and property loans, you must see that the platform has significant loan origination experience and in collecting and chasing bad debts.
With an Innovative Finance ISA, investors can make peer-to-peer lending so that the earned interest remains tax-free. You should keep in mind the points mentioned above for choosing the right IFISA platform. Furthermore, you should read reviews to find out how the investors feel about the company and choose a company that the Financial Conduct Authority regulates.