Peer to Peer Lending
What is peer to peer lending?
Peer to peer lending, otherwise known as crowd lending, is a system consisting of companies acting as financial matchmakers with individuals willing to put money aside for saving purposes in hopes of getting good, reasonable returns. This service is suitable for those who have money to lend (p2p lending), as well as those looking for loans (p2p borrowing).
Peer to peer lending eliminates financial institutions from the equation, making it easier for an individual to lend money to a friend or neighbour, charge interest and measure time, and wait for their money to be repaid.
Peer to peer (p2p) lending began taking off in recent years in the UK. This form of lending is now a common fixture on the financial circuit. How do you know if it is suitable for you? Read our guide below to learn more about peer to peer lending companies and how and if you can make this service work for you.
Peer to peer lending UK- How it works
P2p lending is not as simple as it sounds. There’s a downside to cutting out the banking middleman- borrowers end up getting lower rates, while savers get high rates. It looks like a service based on saving, but there really is not a savings safety guarantee. Peer to peer lending UK is more of an investment.
Savers don’t have the same protection for their savings as is common during disasters, but there are some safeguards in place.
Borrowers are picked by credit checks and receive a risk rating. The p2p lending company/website does all the repayment chasing on your behalf making it difficult for you to lend anyone you please. This can be helpful if you run into any trouble recovering a loan.
Most popular peer to peer lending sites
The most used p2p lending sites in the UK are Ratesetter, Zopa and Funding Circle. Some smaller ones, but equally popular, include ThinCats, LendInvest and MarketInvest.
Each of these has their own disadvantages, but all have something in common- they act as a safe place for saving and lending. However, some are slightly riskier than others.
These sites are virtual marketplaces allowing one to compare different loan rates, reputations, and if one has spare cash they’ll let you put some away at a competitive headline-beating rate.
However, because of the way these companies lend their members, savers need to prepare themselves to put away their money for a long time.
In addition, these lending sites need to make profits so they can run their operations, so each of them charges a fee.
Zopa, Ratesetter, Funding Circle and others
Zopa is commonly referred to as UK’s peer to peer grandpa as it is the most recognized peer to peer lender in the UK. It has thousands of active members to date.
For savers it works just like a bank. Choose how long you can lock your money away and pick the rate, and Zopa will spread your savings among those it lends to (other members) to spread the risk.
To protect its lenders, Zopa uses a fund called Safeguard which spreads the impact of bad debts across its savers. Your money is spread across several borrowers. The rate offered by Zopa already has the assumed bad debts as well as their fee deducted. When a borrower does not repay, you are protected by Safeguard which ensures you are paid your amount in full including interest. As long as there is not some big catastrophe, you should always get what is promised. It gets risky only when there are too many bad debts at one particular time.
Funding Circle might just be the most traditional peer-to-peer system in that it lends to individuals/businesses based on what they propose. The advertised rates here are usually higher, but so are bad debt provisions which makes it the riskiest.
Alternatively you may choose to spread the risk in savings funds just like those offered by Zopa and Ratesetter. Funding Circle advises you to spread the risk across no less than 100 businesses.
Ratesetter provides a more traditional approach to saving. It does everything it can and acts like a savings account for those who want to put their money away. You can invest in any markets over the year and can withdraw money at any time as long as you meet the minimum of 1000 Euros in your account.
Ratesetter also has its own fund that covers any shortfall resulting from bad debts.
So, peer to peer or savings?
If you’re looking for a money saving option then peer-to-peer lending may be a sensible option, but there are a few things you need to be aware of.
First of all, are you prepared to have your money locked away for lengthy periods of time? P2P only works if you are happy to have your cash unavailable for as much as five years.
It’s not where you go looking if you want access to cash any time soon. If you fall into this category you may need an ISA, an instant-access savings account or a current account. Some peer-to-peer sites let you take out your money quickly, but you run at a risk of losing a lot of interest.
Another thing you need to be wary of is security. Unlike in the early days, peer to peer sites in the UK are nowadays regulated, but you have no guarantee of an overarching compensation scheme in case things go wrong.
The more popular peer-to-peer lending sites have a separate emergency fund that they use to protect their clients against bad debts and shortfalls that may occur in repayments. However, much smaller lenders don’t have these options and they do employ limits.
If one of these sites was overwhelmed by bad debts and the scheme is no longer able to cover you, you could end up losing a lot of cash.
Most savers will choose a particular p2p lending company in the UK based on the rate offered. Remember to compare lending rates against those offered at banks for long term savings. Banks pose much less risks than peer to peer companies.
If you are a borrower then the peer to peer system may be a good alternative for you. You won’t have to worry about losing money like the lenders do. However, ensure you read the rules on debt repayment carefully. If you set up a Direct Debit, you will be able to cover repayments and keep track of the duration of your loan.
More and more peer to peer lending companies are springing up in the UK. It is up to you to look for the best rate possible.