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The year of peer-to-peer finance

Peer to Peer lending advert

Last year, peer-to-peer websites lent out more than twice as much money as they did in 2012. In fact, this alternative to borrowing and saving with a bank recently became a £1bn industry.

From 1 April, loan-based peer-to-peer and crowdfunding websites will be regulated by the Financial Conduct Authority (FCA), which should provide increased consumer protection and give further credence to alternative finance. These are exciting times for an industry rapidly growing in popularity.

Peer-to-peer lending matches investors, who are willing to lend, with borrowers who may have struggled to get a loan from the banks, through dedicated websites. The attraction for investors is that rates of return can be better – by around 2.5% on average – than those offered by traditional savings accounts.

Matching savers with borrowers

Peer-to-peer websites see regulation as a key moment in the industry’s fledgling history. Combined with the fact alternative investment activities are to be included in the new tax-free Isa wrapper worth up to £15,000 it’ll almost certainly result in an influx of new, interested investors putting money into peer-to-peer sites.

However, this may put the services under pressure to meet demand. Up to now, they’ve been conservative in assessing credit risk as they know that having too many risky borrowers in default, thus losing investors’ money, will soon deter people.

Some sites have indicated that they’re now keen to relax risk profiles as they seek to maintain momentum. While they believe they can do so without defaults rising too much, it’s inevitable that they’ll start to increase.

Regulation should help investors make informed decisions about the returns and risks of peer-to-peer lending. But the sites need to be careful not to endanger the endorsement that it brings as they seek to take advantage of the opportunities for growth ahead of them.

Comments
Profile photo of dave newcastle
Member

This story leaves a lot to be desired. It assumes prior knowledge of peer- to- peer lending. I know nothing about the topic. Two questions immediately come to mind:
1. There appears to be a third party called a” website” so I expect it participates in the system to make a profit so it is really peer- to- website- to- peer lending. This switches on a flashing red light.
2.What security does a lender have in the event the borrower fails to repay? For example if a group of lenders make equal contributions to a loan to a borrower for a mortgage and the latter defaults on repayments do the borrowers behave like a bank/building society i.e. acquire the house and sell it and distribute the proceeds equally between themselves- after charges by the website?
Sounds a bit like the stock market.

Profile photo of David Paine
Member

Hi Dave,

Apologies if you found the blog post a bit confusing but Robert below has described the activity of peer-to-peer lending pretty well. If you click on the words ‘peer-to-peer lending’ highlighted in red in the third paragraph it will take you to our online guide which explains in more depth what peer-to-peer lending is, how it works and explains the advantages and disadvantages. You can also find it here: http://www.which.co.uk/money/credit-cards-and-loans/reviews-ns/peer-to-peer-lending-websites/peer-to-peer-lending-explained/

But in answer to your questions, all peer-to-peer activity takes place on dedicated websites. You might have heard about one or more of the big three in the UK which are Funding Circle, RateSetter and Zopa. However, there are more than 30 others in operation, each with their own unique selling point, so the market is quite diverse. These websites do indeed charge fees to both borrowers and lenders but now this should be made quite clear to you how much that will be and how it will be applied before you lend or borrow.

Regarding security, it depends on which site you have put money into as to how it aims to minimise the risk to the lender. RateSetter and Zopa, for example, both have pots of cash made up of fees that acts as reserve that will pay out to lenders in the event of a borrower failing to repay. While there haven’t been any problems to date, there are no guarantees the reserves will pay out. Funding Circle, meanwhile, doesn’t do this but it does split up a lender’s investment into chunks, or loan parts. This means that should a borrower fail to repay you won’t have lost all of your money. There are also other peer-to-peer sites which do secure loans against assets.

I hope that helps.

David

Profile photo of rarrar
Member

I agree the article isnt a beginners guide to peer-to-peer lending.
The peer-to-peer company matches borrowers to lenders, hopefully credit rates them, collects the repayments and distributes them, chases bad debts etc.
All for an admin fee of course !
Loans tend not to be secured – so no mortgages.
It is not as easy as putting your money in a savings account and in many ways that is a good thing , you need to understand the whole process and assess the risks if you are going to lend in this market. Basically the higher the return the higher the risk.
However the main players are keen on some regulation to protect their reputation, and there are some tax anomalies = individuals can not write off bad debts against income unlike commercial lenders !

Profile photo of tom
Member

‘Some sites have indicated that they’re now keen to relax risk profiles as they seek to maintain momentum’.

They certainly have.
Currently my losses with Funding Circle are 75% of my earning, giving me a 2.3% return.

Total waste of time.

Profile photo of rarrar
Member

Go for a lower return with a P2P company that runs a protection fund like Zopa or Ratesetter.
I get ~2.6% on monthly loans and 6% over 5 years with a well funded default fund to hopefully cover losses.

Profile photo of tom
Member

That is exactly what I am doing, as soon as I can extract the funds from F.C..
I set the criteria on autobid for A rating and a modest interest rate, and everything was fine in the initial years, this was changed by F.C. without my knowledge or consent, but there is no way to prove it.
‘You must have clicked on something’, was the only response I got from them.
I didn’t because I hardly ever visited the site, as it was meant to be a long term investment.

Profile photo of rarrar
Member

Must admit I consider the concept of lending to businesses far riskier than to private individuals so have avoided FC.

Profile photo of tom
Member

Having started and run my own business for 22 years, (and now retired), and knowing all too well the problems of obtaining loans for expansion etc. from the banks during my time, I thought I could ‘put a bit back’, and give some assistance to those following in my footsteps.

However, what started out with F.C. as a worthwhile idea, seems to have degenerated into a lending free-for-all, without the proper checks and security being in place. (Maybe to get themselves in pole position ready for when P to P lending is allowed within ISAs)

It’s time ‘Which’ did a thorough investigation on this organisation.