The peer-to-peer, or P2P, lending market is still relatively small in the UK, but it has recently topped £250 million.
If you haven’t heard of it before, P2P platforms are places where individuals can lend money to other individuals, or businesses, hoping to make a profit on their lending.
What’s in it for a lender?
In theory, lenders get their loan back plus interest, and the P2P platform takes a moderate fee from the profits. However, lending through these platforms should always be seen as an investment or business opportunity, rather than anything similar to a standard savings account.
This is because you can potentially lose all your money if your borrower defaults on the repayments. There’s an element of risk involved, and the money is not covered by any guarantee system, unlike, say, the Financial Services Compensation Scheme which protects British savers. New financial regulatory schemes are being put in place by the government over the next 18 months or so, but there’s no sign of them yet.
A P2P lending site called Quackle recently went bust with, allegedly, almost a 100% default rate, although that’s thought to be because it had an unusual business model based on social media (unlike all the other P2P platforms in the market). Larger, more established P2P platforms tend to report a default rate of 0.8% or so, which is much lower than standard banks. If you absolutely can’t afford to lose your money, you might be better off putting it into a savings account – but then again, if your circumstances are different then you might decide it’s worth taking a risk.
As a lender you also have responsibilities, as well as risks: you must also agree to be bound by the rules of the Office of Fair Trading.
Aside from profit-making ventures, there are also one or two ‘microcredit’ platforms. These support low-interest P2P lending to help people in developing countries start their own small businesses. Most people who lend through these platforms put their profits back into the loans pool. this lets them lend to more people in turn after the initial repayment, rather than cashing in – so it’s more of a charitable or non-profit venture.
What’s in it for a borrower?
At the moment, it’s relatively hard to get credit at a reasonable price from banks and other conventional lending facilities. The interest rates at P2P lending sites tend to be lower than banks, unless they are the type of site that offers ‘payday loan’ type borrowing, which tends to be very short term and high interest.
P2P lending may also be the only cheap-ish form of credit available to some of us, if all the banks have already said no.
Right now, P2P loans can be quite competitive – have a look at price comparison sites to see just how competitive – but if the banks suddenly start cutting their lending rates then this could all change.
Who are the big P2P lenders?
The three biggest peer-to-peer platforms in the UK are:
- Zopa: this platform is the biggest player, and makes personal loans. Unlike other lenders, Zopa breaks up investors’ money into £10 chunks, spreading the risk of default between many borrowers – investors are less likely to lose the whole lot to one defaulting borrower.
- Funding Circle: a marketplace that lends to small businesses, rather than individuals.
- RateSetter also makes personal loans.
All three of the above platforms are members of the P2P Finance Association.