So what exactly is “Innovative Finance”?
We’ve all heard of cash ISAs and stocks and shares ISAs, but what about the new kid on the block? How much do you know about the innovative finance ISA?
Available since 6 April 2016, the innovative finance ISA allows you to invest in peer to peer lending companies. These are also more commonly known as crowd funding sites. You may familiar with the bigger names ZOPA or Funding Circle.
In simple terms, they match up individual borrowers with people looking to lend money. Unlike bank loans, peer to peer loans they can generally be taken out for any purpose and can be for something as large as a house deposit or business start-up fund, or something as small as a new bed for a student moving out for the first time. They are generally available for both individual and corporate borrowers, although criteria varies from one site to another.
The interest rates available to those borrowers are set based upon their credit status and “repayment history”. Like with any lending, more responsible borrowers earn a lower interest rate, whilst unreliable borrowers pay a premium.
Lenders can pick which borrowers they want to lend money to and can build a portfolio of loans.
The main attraction for lenders is that rates can be significantly better than cash, for example c. 3% on short term loans, but despite sounding like savings these are very much investments, and high risk ones at, with the risk that borrowers could default on their repayments and no depositor protection scheme like there is with cash deposits. There can also be liquidity issues and the risk that you can’t get your money back when you need it.
So they won’t be suitable for most people and only professional financial advice can determine whether they are suitable for you and your particular circumstances.
That said, if they are for you, holding them within an ISA means that any interest earned is tax free. You are still limited to your total annual ISA allowance of £15,240 per tax year and this covers any money you put into cash and stocks and shares ISAs in a tax year, as well any you put into an innovative finance ISA.
The content of this blog is for information only and should in no circumstances be construed as formal advice. Should you require further information and advice as to whether an Innovative Finance ISA may be suitable for you, please contact our Financial Planning Team on 01772 840426.