Why The Best Time To Lend Is Now

Borrowers were hit hard over 2022 and 2023. Property prices were unclear and somewhat rocky. And those who were borrowing to complete property developments have been suffering a shortage of workers.

The worst for borrowers though was rocketing inflation. That didn't just push up interest rates, but also the costs of buying anything, which made it harder for borrowers to meet their loan obligations. For property developers it's especially stressful, as the cost of building materials rose substantially.

Individuals lending their money through P2P lending platforms have hardly suffered any damage from all of this in terms of losses.

Yes, a large number of loans are still facing substantial delays. Some losses of interest, and even some losses on the actual amount lent will certainly slip through on a small number of loans.

But, the trajectory, the prognosis, is clearly showing P2P lending's incredible stability. When the dust starts settling over the next six months or so, lenders will still have made highly satisfactory returns.

That doesn't meant that lenders weren't impacted. Surging inflation impacts everyone:

The worst time to invest (or lend) in practically anything is during rapidly rising inflation

In late 2021, inflation started its rapid rise from around 2% to 11% and stayed high for around two years.

Rapidly rising inflation temporarily nullifies positive returns on investments. Even gold, often considered colloquially a great hedge against inflation, in reality has been pretty rubbish.

Long lingering high inflation can certainly be an issue in lending and investing, but, to be clear, the worst results are caused by the rapid rise in inflation, rather than when it remains high for a long time.

The impact of the rapid rise continues to hurt returns for a year or more after the inflation rate has peaked.

That's why the swiftly rising inflation rate through 2022 led to P2P lending's first ever year where the returns actually earned by lenders were beaten by rising prices. That means that lenders could buy less at the end of the year than at the start, despite having very positive lending results.

Individuals doing P2P lending have been beaten by inflation in just 1-in-19 years since it started in 2005, compared to one in every three years for the stock market. But still it's disappointing.

While inflation remained high through 2023, interest rates largely caught up at some point and so lenders beat inflation again.

And that gets us back to the point I'm making in this section. The issue is that, when inflation is rising fast, interest rates can't keep up to begin with.

That's especially as P2P lending rates are almost always fixed, so existing borrowers get to enjoy the lower rates they are tied into, but those lending their money are also, by and large, tied into those lower rates as well.

The best time to lend is now

Over the past year, inflation has plummeted down to 3% almost as swiftly as it rose. This means we're now seeing those same effects in reverse.

Yet existing borrowers – and even borrowers starting to borrow in the next few months – are stuck paying high interest rates until their loans are repaid.

And lenders now reap the benefits of that. Because its currently still easy for lenders to build a diversified portfolio across multiple accounts and hundreds of loans paying an average of around 9%. This massive spread between 3% or so and 9% won't last forever, but even if it swiftly falls to a mere 2-3 percentage points of spread, ongoing lending at the higher rates will more than make up for any negative impact you suffered in 2022.

So the real returns on lending – “real” meaning the gains you make when factoring in inflation – are now doing extremely well indeed.

The Bank of England doesn't think inflation is completely under control, but no-one there is suggesting that inflation is going to rocket again in the way it did two years ago.

It's at times like this when holding onto loans that you got over the past year, or lending fresh money now before rates on new loans start to sink, that lending is really going to pay off in a big way.

To paraphrase the authors of the remarkable Global Investment Returns Yearbooks and Sourcebooks: “Money lending comes into its own during periods of disinflation and deflation.” These are the absolute definitive research on investment returns, with better methods and datasets than any other researchers, so they know what they're talking about.

And it's because you have these fixed lending rates that ultimately rose to catch up with inflation and which are now locked in, even as price rises plummet (which is called “disinflation”).

These effects are going to last one to two years for people lending in loans now.

Naturally, the results of money lending – like all investing – isn't dictated by just one thing, such as inflation. But, all else being equal, this makes it an exceptional time to be in P2P lending.

Investing new money is particularly good right now, as any new loans will either be made to borrowers that don't have the same issues as we have seen in the past few years, or the lending rates and lender security now factor those things in even more than they did previously.

Lending and investing is not about the next 12 months

All that said, the swings around roundabouts caused by inflation should not lead you to panic buy and sell any investments. Reacting to every bit of economic news is invariably a strategy to lower your returns.

So it shouldn't weigh heavily on lenders' and investors' minds, even if you decide to put some more money in now.

More importantly, have a plan to keep re-lending and re-investing regardless of the economy, so that your money earns returns for some years in a row.

While that is less important in P2P lending than in the (much more volatile) stock market – it still absolutely applies. Because this way, you have the best chances of being satisfied with your results at the end.

Further reading

P2P Lending Beats The Stock Market, Yet Again, In 2023.

The Inaccuracy Of Property Price Forecasts.

Compare and create a basket of lending accounts averaging ca. 9% with ease.