Peer to Peer Vs Crowdfunding
Both Peer2Peer lending and crowdfunding have received masses of press attention over the last few years and both sides of this new industry have grown exponentially since they started just a few years ago. You can also read a copy of our Guide to Making Peer to Peer Loans here.
Although often lumped together under the general banner of ‘crowdfunding’ and although both share the same concept of raising finance from a crowd of people who pool their resources, most people don’t appreciate that crowdfunding and peer-2-peer lending are in some ways very different animals.
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This article deals with matters from an investor’s perspective and clarifies what each of them are, how do they differ and which may be right for you.Crowdfunding is what is known as an equity investment. You acquire shares in a company in exchange for your investment. You will be entitled to a share in monies paid out as dividend and may providing you can find a buyer sell your shares. Any profit you make upon sale will normally be deemed as a capital gain and subject to CGT (after the annual allowance has been taken into account).
If there is no profit to be shared out, you will not receive a dividend. And if the shares fall in value you may lose money. In respect of property crowdfunding with The House Crowd if shareholders voted to sell the property at a loss (though we are not sure why they would do that) then you would lose part of your capital investment.
When an asset such as a house is sold shareholders are paid out in order of priority only after debts have been paid, so if there is a mortgage or other secured loan against the property, the creditor will be paid out in full before shareholders.
Many people like equity crowdfunding as it gives them a share in a property (via their company shareholding) and they get the benefit of a share of profits from rental income and in the capital growth of the property. Property throughout the last 50 years has proven to be one of, the best ways for most people to provide for a good retirement income and investing in property through crowdfunding gives almost everyone the opportunity to do so in a hassle-free way. We believe investing in buy to let property should be viewed as a medium to long term investment.
Equity investments such as The House Crowd offers are normally regarded Sharia compliant and suitable for Muslim investors – though that is a personal decision for each investor.
As far as tax treatment go – as from April 2016 we do not have to deduct tax at source and the first £5000 worth of dividend income you receive will be tax free.
Peer 2 Peer secured lending on the other hand tends to involve a very short term investment period of 6-18 months and involves more active management of your money.
Investor’s money is secured against a property via way of a legal charge registered at the land registry and will be up to a maximum loan to value. E.G., if there is £100,000 equity in the property and the maximum loan to value (LTV) is 75% we would not lend more than £75,000. This provides a cushion to try and ensure that capital is safe, should the borrower default and the property has to be sold quickly.
You do not receive any equity in the property but on the plus side you will receive a fixed rate of interest and will have a fairly good idea of how long your money will be tied up (though this can vary if loans are not repaid on time). It is an illiquid investment with little opportunity to sell your loan to a third party so it is likely that you will be tied in until the loan is repaid.
It is expected that P2P lending will be available under an ISA wrapper from April 2016 making the returns tax free. Bearing in mind the returns on offer on our website range from 7-10% p.a., this new development is likely to prove very popular.
Peer 2 Peer lending is not Sharia compliant as interest is paid to investors.
One of the golden rules of investing is diversification, so it may be worthwhile looking at spreading your investments over both P2P lending and Crowdfunding to take advantage of both.
At The House Crowd we are unique in that we offer both equity crowdfunding and peer 2 peer lending secured against property.
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Peer to Peer Vs Crowdfunding Comparison:
You can also read a copy of our Guide to Making Peer to Peer Loans here.