How to address inflation with your P2P portfolio

Savers are being urged to consider alternatives to cash as official data shows the rate of inflation has hit a 40-year high, and that could involve diversifying into peer-to-peer lending.

The consumer price index – including energy and food – rose from seven to 9 per cent between March and April, according to the Office for National Statistics, and there are predictions that it could enter double digits as bills continue to rise.

Financial analysts and commentators warn that while savings rates are rising, returns are still way below inflation.

Sarah Coles, analyst for fund supermarket Hargreaves Lansdown, highlights that the highest easy access rate on the market is currently 1.31 per cent.

Read more: Banks write-off more business loans as inflation hits borrowers

She says there is a place for having cash in savings, but its value can be eroded by high inflation if it is left sitting in an account for years.

“If you have savings you won’t need for five years or longer, it’s worth considering whether any extra money could be working harder for you in investments,” Coles said.

“These will rise and fall in value over the short term, but over 5-10 years or more they stand a much better chance of beating inflation than cash savings.”

Investing in the stock market over the long term can help beat inflation but there are also P2P lending accounts that offer double-digit returns.

Backing P2P loans is different from saving or stock market investing, which both have Financial Services Compensation Scheme (FSCS) protection if a provider goes bust.

But there are rewards for taking that extra risk and backing borrowers, in the form of higher rates.

Read more: Business insolvencies increase amid spiralling inflation

P2P lending rates after bad debts range from around four per cent with platforms such as Assetz Capital, around seven per cent with brands including CrowdProperty and Kuflink and 10 per cent with LandlordInvest, according to P2P analyst 4th Way.

These rates may not all beat inflation but it may also be beneficial to spread your money across different assets in an attempt to boost returns and navigate volatility elsewhere, such as in the stock market.

Many of these P2P investments can be held tax-free through an Innovative Finance ISA.

Beating inflation each year shouldn’t be the ultimate goal for P2P or any type of investors, 4th Way argues, as it could mean taking unnecessary risks or putting too much money into one platform.

“Money lending is not as much of a long-term commitment as the stock market, by any means, but it’s still something of a commitment,” Neil Faulkner, founder of 4th Way said.

“You need to be prepared to tie yourself in for some years, if necessary.

“The best investors have always acknowledged the natural life or horizons of their chosen investments in this way, and been prepared to hold on patiently. You simply find high-quality investments and stick with them. I recommend you do the same with P2P lending.

“In order to benefit from the greater returns in the years after any rapid rise in inflation, you continue to re-lend payments and interest received by borrowers.”

Read more: How to do your due diligence on a P2P platform

Coles said people are now looking to make their money work as hard as possible.

“Some people if they have a wide and large diverse portfolio of investments, could consider peer-to-peer lending as an option if they are keen and understand the risks,” she told Peer2Peer Finance News.

Hinesh Patel, portfolio manager at Quilter Investors, said alternatives need to bring something different to the table.

“There is a place for peer-to-peer, but with careful selection and caution,” he said.

“There are many risks to consider, including underwriting standards, position on claim and ability for recovery.

“Liquidity may not be daily. Instead, we prefer investing in specialist direct lending, collateralised loan obligations and equity tranches.

“In all cases, however we rely on our analyst and due diligence teams to maintain ongoing assessment – and the risk/reward here is very much inflation-busting.”