Start Lending Now Before P2P ISAs Arrive

When P2P ISAs arrive, probably this year, we'll be able to lend tax-free, but a surge in lenders could see interest rates plummet. Here's how to handle it.

What good are P2P ISAs?

Currently, when you lend your money through P2P lending websites in return for interest, you have to pay tax on the income you receive. Interest rates are still considerably better than savings accounts and even cash ISAs (tax-free savings accounts), even when discounting for the higher risks involved.

But tax-free lending will considerably boost our gains. A basic-rate taxpayer lending £5,000 for five years today through one of the safer P2P lending companies might make around £1,300. When wrapped in an ISA, it will be bolstered by an extra £400.

P2P ISAs means more competition

When there are more lenders throwing money in, it pushes interest rates down. Lots of money sloshing around makes it easier for borrowers to borrow and, since the lenders who accept the lowest rates win,

This suppy-and-demand effect impacts all P2P lending companies, regardless of how they operate.

The effects will be temporary

This isn't a reason to rush headlong into an investment – for lending is an investment – without learning about what you're doing and thinking it through.

And the effects won't last forever. More lenders competing to lend and pushing rates down will encourage more borrowers to check out P2P, and the see-saw will tip back again.

But if you're thinking about taking part when P2P ISAs arrive, consider getting in early. I expect many companies in this high-tech industry will enable us to smoothly transfer in any of our existing loans in to our ISA accounts. This means we can get pre P2P ISA rates and then still benefit from the tax-free proceeds.