Neil Faulkner, co-founder of peer-to-peer lending risk-ratings agency 4thWay, says peer-to-peer allows investment outside the stock market, therefore the sector can help with spreading an investor’s risks or reducing risks.
Mr Faulkner adds this type of vehicle offers a good chance of growing a pot of money faster than inflation or supplementing income by earning interest on loans.
He says: “At the more exciting end, there is higher interest, higher-risk peer-to-peer lending, and some of the platforms allow you to horse trade loans to get much higher returns.”
Mr Faulkner says peer-to-peer can also appeal to those keen to help out UK businesses and individuals.
He says: “You can sometimes choose specific people or businesses to help, after they have been screened by the platform.”
However, John Goodall, chief executive and co-founder of Landbay, warns this is still a nascent industry with platforms launching on an almost weekly basis in the UK.
Not all of these businesses are regulated or display information in a clear and straightforward way, Mr Goodall notes.
As with any investment, he says it is important to do your research before committing funds, and to consider all points in the previous question.
It is also vital to understand the tax ramifications of peer to peer investing.
Tax implications of P2P lending
Until 6 April 2016, investors are being taxed on interest earned at their own income tax rates.
Most platforms provide easy annual statements to make declaring the interest easy.
Some basic-rate taxpayers who otherwise do not complete tax returns have simply posted these annual statements with a cover letter to HM Revenue and Customs, says Neil Faulkner, co-founder of peer to peer lending risk-ratings agency 4thWay.
If a platform charges lenders a fee directly, Mr Faulkner says you cannot deduct this fee from your interest for tax purposes.
Most platforms now charge the fees to the borrowers, he notes.
So far, Mr Faulkner says HMRC has not attempted to tax cashback offers, because it is an inducement rather than income from lending.
Some platforms allow lenders to buy and sell loans at a profit.
Usually Mr Faulkner says you can expect to pay capital gains tax on these gains, although lawyers at one platform - Funding Circle - currently believe that its structure makes capital gains tax free for investors.
From 6 April 2016, the first £1,000 of interest earned in savings accounts and P2P lending accounts will be tax free, unless the investor is in the very highest tax bracket, Mr Faulkner says.
In addition, P2P lending will be allowed in Isas.