P2P firms top the £250m mark as borrowers and savers try to bypass mainstream, writes Jeff Salway.
Websites offering savers inflation-beating returns for lending money to strangers and small businesses are poised to enter the banking mainstream.
The popularity of peer-to-peer (P2P) or social lending services has grown steadily over the last four years as savers and borrowers have sought to bypass the high street banks by doing business with each other directly.
The three main P2P firms have topped the £250 million lending mark, it was revealed this week, and they have been tipped by the Bank Of England to become a credible rival to the mainstream banks over the coming years.
The government has picked up on the sector too, inviting P2P lenders to compete for up to £100m of funding aimed at boosting the alternative finance market.
So what’s the secret behind the rise of P2P services? Why would you use them? And what are the risks? Here we answer those questions and more to help give you a better idea of what they offer.
Q WHAT EXACTLY IS PEER-TO-PEER LENDING?
AWith banks and building societies tightening their lending criteria since the credit crunch, it’s become harder to secure affordable finance on the high street. At the same time, millions of savers have watched almost helpless as low interest rates and inflation have wreaked havoc with their savings income.
These firms have thrived by putting savers wanting decent cash returns in touch with borrowers looking for competitive loan rates.
Savers willing to lend money can specify the interest rate at which they want to lend, the amount, the interest they want and the degree of risk they’re happy taking.
In return, they get interest on their savings well above that currently available from normal savings accounts, while borrowers seeking loans get more attractive terms than typically available from mainstream lenders.
Q HOW CAN I BORROW MONEY THROUGH THESE SERVICES?
ASimply go to the site _ www.uk.zopa.com or www.ratesetter.com _ and request a quote.
At Zopa you can enter the amount you want to borrow and the length of the repayment term and it will give you an idea of the rates available on its “market”. Once you apply for the loan and Zopa has your credit score, you will – unless you’re rejected – be categorised under a risk rating that dictates the deal you’ll be offered.
If you borrow £5,000 over three years through Zopa the current interest rate is 7.3 per cent, so your total repayment would be £5,571.
That rises to 10.2 per cent when borrowing £3,000 over five years, making for a total repayment of £3,801. The firm is this month launching two and four-year loans.
To get a loan through RateSetter you must be aged at least 24, have a good credit history and a regular income. You can borrow from £1,500 and the average loan is currently around £4,000.
The rate you’re offered will depend on how much you’re borrowing, the repayment term and the credit risk the assessment arrives at. The average repayment rate on a loan of £5,000 over three years is 10 per cent.
Q HOW MUCH INTEREST CAN I EARN ON MY CASH SAVINGS?
AAt Zopa it depends on the length of your loan, the amount and the risk you want to take. The riskier the borrower category, the higher the return, and vice versa.
The average return is 5.5 per cent, after charges and actual defaults. At the high end of the risk scale you can earn more than 9 per cent, although you can spread your money across different risk levels.
RateSetter offers specific products such as a monthly access account at 3.7 per cent and a one-year bond paying 4.2 per cent. It also has three and five-year income products paying monthly instalments (with the option of reinvesting the income). These currently pay rates of 6.7 and 7.7 per cent respectively, including the fees.
Funding Circle is more peer-to-business than peer-to-peer, offering above-average returns to individuals in return for lending to small businesses.
The loan terms are of one or three years and business borrowers pay lenders a fixed rate of return each month, with an interest rate on top of the repayment.
The average gross yield is currently 8.3 per cent, although it varies with the risk level selected.
Q WHAT DO THEY CHARGE?
AZopa charges lenders an annual 1 per cent fee on the amount they lend, while borrowers pay a fee that’s added to their loan repayment and varies depending on the risk level and size of the loan.
These charges range from £ 20 for loans of between £7,500 and £12,999 in the least risky markets, rising to £200 for smaller loans at the other end of the risk scale. RateSetter lenders are charged 10 per cent of the interest paid, while for borrowers there’s a fixed fee on completion and a credit fee, which varies by credit rating.
Funding Circle charges lenders a 1 per cent annual fee based on the amount outstanding of each of the loan parts. A proportion of this fee is deducted every time a repayment is received from a borrower.
Q ISN’T IT ALL A BIT RISKY?
AAs P2P lenders aren’t regulated by the Financial Services Authority, they’re not covered by the Financial Services Compensation Scheme.
The three firms are the founding – and, to date, only – members of the P2P Finance Association, self-regulating through standards such as segregating client and company money.
With some of the UK’s biggest banking names coming close to collapse in recent years, however, this may not be enough to reassure nervous savers.
Consequently, P2P lenders have much to do to convince customers that their money is safe.
All three P2P lenders have bad debt levels of below 1 per cent, although that’s likely to rise as their loan books get bigger. Zopa and RateSetter lenders are protected by having their money spread across a number of different borrowers, so they aren’t exposed in the event of one person defaulting.
RateSetter goes a step further with its “provision fund”. This is a ring-fenced pot of money that increases with each loan matched, with the aim to guarantee that savers get all the capital and interest they are owed.
Funding Circle lenders are exposed to small start-ups that are particularly vulnerable in the current climate. That is offset to some extent by spreading the loan across different business, with a maximum exposure of 5 per cent to a single company. All borrowers must have at least two years of audited accounts to qualify for a loan.
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