Alternative Lending Review, Part IV: Be Secure - Plus Loan Latest
The final instalment of our brief review of alternative lending looks at the major similarities and differences between Innovative Finance Individual Savings Accounts and (IFISAs) "mainstream" Individual Savings Accounts (ISAs).
IFISA - Similarities With Other ISAs
The IFISA is an ISA like any other. The £20,000 annual allowance applies to all types of ISA: IFISAs, cash ISAs, lifetime ISAs, and stocks and shares ISAs. It's possible to have capital committed to any of these categories
Transfers work in the same way. Transfers into and out of IFISAs work in just the same way as transfers from, say, a Cash ISA to a stocks and shares ISA. An individual can transfer cash from a Cash ISA, for example, into as many IFISAs as desired. But to open a new IFISA, the rules require just the individual to use just one in a given tax year. After that, flexible transfers are possible.
The annual ISA allowance is precious. To keep the annual £20,000 allowance in tact, it's imperative to use the transfer mechanism. If an individual sells up a Cash or stocks and shares ISA to buy an IFISA, the allowance will be lost. Most lending platforms have readily available transfer facilities (typically downloadable forms for those who prefer paper transactions).
IFISA - Key Differences
The big difference between Cash ISAs (especially) and IFISAs is that IFISAs are not cash instruments. The loans carry risk – which all reputable lending platforms will highlight, and any adviser should understand an communicate fully to a client. IFISAs are not to be confused with cash accounts. The Financial Conduct Authority has issued a guidance note to the industry expressly disapproving of the promotion of IFISAs alongside Cash ISAs.
IFISAs are investments with an attractive yield ad a downside risk – just as stocks and shares ISAs carry the possibility of growth and income with a commensurate downside risk.
Liquidity is another important issue to address. Cash ISAs are redeemable according to the terms of notice (a few months is usual). Loans in an IFISA cannot be instantly turned into cash. They will typically be for a fixed term of one, two three or as much as five years. Lenders who want to get their capital out shouldn't expect the borrower to remit capital early. The exit route for early capital withdrawal is to sell the loan to other registered lenders on the platform. A key sign of a healthy platform is a vigorous secondary market where lenders can sell on their loans with little difficulty.
Security is another issue. Most Cash ISAs are issued by regulated banks and building societies. As such, the first £70,000 or so on deposit is protected by the Financial Services Compensation Scheme (FSCS). Most lending platforms are not covered by the FSCS. Some, such as Money&Co., which has asset management functions in its group of companies, is. However, that does not mean that if a loan goes bad, the money is safe. The FSCS protection only relates to monies held by the institution. So if a platform were to get into difficulty, the FSCS would protect any uninvested monies held by that platform before lenders invested. The loan itself would not be protected.
To check levels of security, the lender should see what the lending platform's risk analysis is, what charges it takes on the assets of the bower (so that they can be seized and sold if the borrower defaults) and look at the platform's track record – how have the loans performed?
The key factors are security, access and yield. See the foot of this page.
New Loans Latest
Project Rhapsody is now 74 per cent funded. The loan offer has an A risk rating, and provides a fixed-rate return of 8 per cent over five years.
Log in or register for full detail. As ever, we've done due diligence but cannot categorically warrant that the representations are true. Read risk warnings on site. Our current annual bad debt rate is 0.03 per cent over more than five years (see also risk explanations and associated articles below).
The second tranche offered by Yes You Can is a B-rated offering, over a five-year term, with a fixed rate yield of 11 per cent gross. It is presently nine per cent funded.
Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee).
That figure is the result of over £18 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders' capital is at risk. Read warnings on site before committing capital.
Money&Co. has been lending for over 5 years and has only had one bad debt so far, representing a bad debt rate of 0.03 per cent per annum.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income.Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.So here's our guide to the process:
Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
Step 3: Buy loans in the loan market. Once you've put cash in your account it will sit there - and it won't earn interest until you've bought a piece of a loan. It's this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans - all loans on the Money&Co. site can be held in an IFISA - and your money will start earning tax-free interest.
The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We're assuming a 7 per cent return, net of charges and free of tax here.Once you have made your initial commitment, you might then consider diversifying - buying a spread of loans. To do this, you can go into the "loans for sale" market. All loans bought in this market also qualify for IFISA tax benefits.