If you’re interested in an Innovative Finance ISA (also known as a peer to peer lending ISA), you should be aware that IF ISAs can be based on different types of peer to peer loan. They broadly fall into three main categories: consumer loans, small business loans and property loans.

As with every investment opportunity, it’s important to consider all the details, rather than focus exclusively on the tax-free returns advertised. With that in mind, let’s take a closer look at the different types of IF ISAs that are available.

Consumer loan IF ISAs

Consumer loans are normally considered as the classic form of peer to peer lending as they were the first of their type to launch, starting in 2005 with Zopa. They’re usually used to finance more extravagant purchases like weddings or holidays, but they can also be used to consolidate debt.

Platforms that provide these types of loans, such as Lending Works, usually assess borrower credibility by purchasing data from Experian or Equifax. This generally means that consumer loans tend to be small and unsecured with interest rates of 4-5% per annum. However, they’re generally appealing as investment vehicles because of their relatively low entry point, with some providers, allowing you to invest as little as £10.

Business loan IF ISAs

Small business loans are usually taken out by businesses that are in periods of growth. Usually, they’ll use the money to expand into new regions, buy assets or solve a short-term cash flow issue. The loans are offered to active limited companies and are often secured against the business’ assets.

Similar to consumer loan IF ISAs, business loan IF ISAs offer a low entry point for investors, with some starting from £100. Returns can range between 6-7% per annum.

Property loan IF ISAs

 Property has always been an appealing investment – it’s tangible and has been proven to increase in value (when the market is right, of course). The problem with property investment is that it has traditionally been quite inaccessible. In addition, as of 2020, buy-to-let investors won’t be able to offset any mortgage interest against their profits, reducing its appeal.

That’s why investing in peer to peer property lending is becoming more popular for those who want to invest in property without dealing with the negatives of investing in a buy-to-let. You can invest from as little as £1,000; you don’t have to find a tenant or manage the property yourself and interest rates are high – potentially in excess of 10% per annum.

Your investment should be secured by a legal charge against the asset. This means that if the borrower defaults, the provider can force a sale of the property and safeguard your investment. Be conscious of whether the investment comes with a first or second legal charge – it’s the difference in you being first or second in the creditor queue if the borrower defaults.

However, note that ‘secured’ does not mean that your investment is guaranteed or protected, as house prices can decrease as well as increase. Investments are not covered by the Financial Services

Compensation Scheme (FSCS).