How Does an IF-ISA Work? The Mechanics of P2P Lending 

For centuries people have lent money to others on their own terms, without going through banks or institutions. This form of lending, known in modern times as peer-to-peer lending, is an increasingly popular form of getting loans and gaining better interest rates as an investor. 

What is Peer-to-Peer Lending? 

Peer-to-peer lending allows you to offer loans to other individuals, cutting out financial institutions such as banks and lenders. Often referred to as ‘social lending’ or ‘crowdlending’, P2P lending has dramatically increased in popularity as an alternative way to lend money. 

There are three categories of P2P lending, including consumer P2P lending, business P2P lending and real estate P2P lending. Websites such as Kuflink directly connect investors to borrowers, allowing you to set a rate that is appropriate for the credit-worthiness of your borrower. 

1. Open an account on any P2P lending website. Deposit any amount of money, which will be divided up into various different loans. 
2. A borrower will post a financial profile. It will be assigned a risk category that will determine the interest the applicant will pay. 
3. Your money will be sent to the borrower through the platform. 

Peer-to-peer lending has rocketed into the mainstream since the economic downturn in 2008. Traditional banking interest rates have dropped, and high-risk investments like the stock market and Bitcoin have been plagued with volatility. This has created an appetite for low-interest, low-risk lending and led to the creation of the Innovative Finance ISA. 

What is an Innovative Finance ISA? 

An Innovative Finance ISA, often referred to as a peer-to-peer ISA, is a relatively new form of savings account in the UK. The main appeal of an IF-ISA in the UK is that it allows the lenders to receive tax-free interest on their loans. 

As these loans are managed by P2P platforms instead of building societies and banks, their running costs are often much lower. Even after the fees taken by the P2P lending company, investors can expect to get lower fees and higher rates than traditional lending institutions.

IF-ISAs allow you to not only lend individuals money but to businesses and infrastructure developments. Before their launch in 2019, P2P lenders would be required to declare any profits from P2P lending to HMRC. The IF-ISA takes tax out of peer-to-peer lending completely. 

If you are over 18, you can invest a total of £20,000 into an ISA. The fact that IF-ISAs allow you to shield your investments from tax should be music to the ears of any investor. Your ISA also does not include transfers from ISA funds from previous years, so any interest you may have gained will not eat into your ISA allowance. 

You can also set up as many IF-ISAs as you like. This means that you can transfer funds you deposited in previous tax years. For example, if you had £10,000 in a cash ISA, you could then open 10 IF-ISAs and deposit £1,000 in each, diversifying your investments straight off the bat.  

How Do they Work Together? 

P2P lending and IF-ISAs work together to allow investors to see healthy returns and allow others to reach their dreams. Whereas previously you would have had to declare the interest gained through P2P lending in your traditional ISA, the IF-ISA allows your returns to be completely sheltered from tax. 

Lending money through an IF-ISA allows you to enjoy all the benefits of tax-free lending inside a tax-free buffer, making P2P lending more profitable for the investor. 

As the explosion of online P2P lending sites continues, they will continue to smooth out age-old financial procedures, help individuals get specialised loans and will contribute to the growth and success of small businesses.