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What's the difference - bonds vs P2P loans?

By our guest writer, personal finance columnist, Sue Hayward.

With bank savings accounts currently only offering paltry savings, with the best offering rates of around 3%, we believe that investing your money in bonds and peer to peer (P2P) loans could be an attractive alternative.

Although investments such as bonds and peer to peer lending (P2P) are not covered by the FSCS protection scheme and carry more risk, if you choose P2P or bonds carefully you could achieve returns of around 5-7% a year in interest.  

So, what are P2P loans and bonds?  Both can offer the chance of a regular income but scratch beneath the surface and there’s very little differences to be found.

Both types of investment require you to invest a lump sum of money for a defined period of time. When it comes to how you get ‘paid’, both are usually on an ‘interest only’ basis, so you’ll get interest at regular intervals, but won’t get your capital lump sum back until the end.

In simple terms a bond is like an ‘IOU’. You lend some money to a Government or company for a fixed period and it promises to pay you back with interest.  Just to avoid confusion; ‘savings bonds’ are totally different.  Saving bonds are offered by banks and are basically just fixed term savings accounts.

Bonds returns vary according to whether you buy them individually or invest in a mixed ‘bond fund’. Bonds have been unpopular in recent years because of depressed rates of return.  However, there are exceptions including one recent popular bond from Wasps Rugby Club offered at an interest rate of 6.5% with a seven-year investment1.

P2P lending is also a chance for investors to lend to businesses or individuals. Instead of asking banks for loans, P2P cuts out the ‘bank’ and websites like Crowdstacker connect lenders and borrowers. 

The biggest difference between the two is how much you can invest and how easy it is to manage your investments. P2P generally offers a lower starting investment from as low as £10 compared with a typical minimum of £2000 with bonds.  And when it comes to the ‘hands on’ approach, with bonds, you’ll usually need the services of a stockbroker or bank, whereas with P2P websites, you can open an account, transfer some cash and get started.

Karteek Patel, CEO of Crowdstacker, explains: “Investors are probably more familiar with bonds than they are with P2P, but there are really many similarities. The key is to find P2P investments that have been managed and structured with the tried and tested approach used to define bonds. This means looking to lend to businesses with solid track records and excellent prospects. If you are happy to do some reading to check up on the financial health of the business you are lending to – and the better P2P platforms provide all the information you need to do this - then, in our opinion, a P2P investment is certainly as attractive as a bond, and definitely can be easier and quicker to set up and manage, and probably offers higher rates of return at the moment.”

As with any money you make, the tax office wants its cut. With bonds, you can be liable for tax unless they’re wrapped up in an ISA or pension.  And with P2P, interest is also liable for tax, but from April the new ‘Innovative Finance ISA’ and the changes to the personal savings allowance, will further boost the benefits of P2P lending.

To view all of the latest investment opportunities offered by Crowdstacker and to download a brochure, click here.

To read similar personal finance articles download your copy of Fixed magazine, Crowdstacker's new, free financial lifestyle magazine, featuring the latest in travel, hobbies, money saving tips and more. 


11th February 2015