How compound interest works in peer-to-peer lending
Peer-to-peer lending offers a unique opportunity for investors to harness the power of compound interest, enabling them to maximise the value of their returns over time.
At the forefront of this approach is easyMoney, where investors are already reaping the benefits of compound interest by keeping their funds invested for extended periods and reinvesting their monthly interest.
“Our platform pays interest on a monthly basis,” explains Jason Ferrando, chief executive of easyMoney.
Read more: easyMoney’s live loan book hits £200m
“This allows our clients to reinvest their interest every month, effectively giving them 12 compounding periods within a year.
“This is a significant advantage over simple interest, which typically compounds only once at the end of the year.”
The impact of compound interest can become evident to easyMoney investors within just two months. Initially, interest accumulates as expected during the first month. By the second month, however, investors begin to earn interest not only on their original investment but also on the interest accrued during the first month. As this cycle continues, the amount available for reinvestment grows, leading to increasingly larger returns over time.
Of course, it is important to acknowledge the inherent risks associated with P2P lending, such as the possibility of borrower defaults, which could result in capital losses. However, easyMoney has maintained a strong track record, with no capital losses reported by its investors to date*. Ferrando attributes this success to the platform’s conservative approach to risk management, which emphasises asset-backed loans and prioritises investor protection.
Read more: easyMoney posts 86pc rise in profits
“We secure our loans with a charge over the assets we lend on, and our average loan-to-value (LTV) ratio across the entire loan book is conservatively estimated to be below 60 per cent,” says Ferrando.
“While not all P2P investment opportunities may be suited for compound interest, the options we provide at easyMoney are certainly designed to take full advantage of it.”
The easyMoney platform is built with investor comfort and efficiency in mind. According to the company’s data, most funds are typically invested within 24 hours, allowing investors to start benefiting from compound interest almost immediately. Moreover, the platform pays interest even on weekends and bank holidays, ensuring there are no delays in receiving interest payments.
This attention to detail is just one example of how easyMoney prioritises the needs of its investors. Another key advantage offered by easyMoney is the ability to wrap investments within an Innovative Finance ISA, which shields all accrued interest – including compounded interest – from taxation.
Read more: easyMoney investors earn more than £30m
Additionally, easyMoney offers corporate accounts, enabling businesses to take advantage of lower corporation tax rates compared to some personal income tax brackets. This can further enhance returns by reducing the taxable portion of their earnings.
Despite these various benefits, Ferrando believes that the most significant advantage for investors who commit to a P2P loan for at least a year is the compounding effect itself.
“Compound interest is a powerful tool that has been recognised for centuries,” Ferrando adds.
“Every investor should be made aware of its potential. While it may not suit everyone – some of our clients rely on their interest income for daily expenses – those who have allowed their capital to grow through compounding have been very pleased with the results.”
By leveraging compound interest, easyMoney is helping its investors achieve greater financial growth with minimal additional effort, demonstrating the value of long-term, strategic investing in the P2P lending space.
*Past performance is no guarantee of future results
DISCLAIMER: Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong.
