Compare Peer-to-Peer lenders offerings side by side. These lenders will perhaps lend when the high street banks will not. In turn they are able to offer savers a higher return on their deposits.
- Annual Variable Rate
- Minimum Loan
- Maximum Loan
- Maximum Term
- 5 Years
- Maximum LTV
What is peer-to-peer lending?
Peer-to-peer lending (P2P), is conducted on websites that allow borrowers and savers to make lending agreements, setting interest rates independently. By the end of 2012, over £300 million had exchanged hands through peer-to-peer lending platforms.
How does peer-to-peer lending work?
When registering with the site, borrowers undergo stringent credit checks to determine their risk category, which savers can then use when choosing how to manage their investments. Savers can choose how much they want to lend, who to lend to, and how long to lend it for. The interest rates set between borrower and lender are likely to reflect the risk profile of the individual or business involved.
The P2P lending platform then takes a small cut for ‘introducing’ savers to lenders. This tends to be much lower than that taken by banks because the lenders are not contributing to a deposit guarantor scheme, and thus do not take on the risk of borrowers defaulting on loans.
Additionally, those who are stuck with sizeable credit card balances at rates approaching 20% could find that a secured loan is a cheaper way to consolidate and repay debts if there are no other options available.
Who does it benefit?
Social lending has benefits for both savers and borrowers. Savers who are frustrated by low returns on savings accounts and ISAs can earn better returns through lending to peers or businesses.
Borrowers who have struggled because of banks’ reluctance to lend might find finance available through P2P lending websites, and at lower rates than conventional lenders.
How safe is peer-to-peer lending?
As borrowers are categorised by risk, savers are able to weigh up the risks they are willing to take for the returns that could be made. But default levels for P2P lending have proven to be remarkably low.
This is due in part to the lower market levels of interest and the lower overheads taken by lending sites. It is also due to the efforts that social leading sites undertake to minimise the risks.
Sites normally allow savers’ investments to be spread across a number of borrowers to reduce exposure to loss in the case of defaults. Zopa, for example, breaks savers’ funds into £10 segments, which spreads the risk across hundreds of borrowers and minimises any one saver’s exposure to losses.
Unlike banks and building societies, the sector is not covered by the Financial Services Compensation Scheme, though it will become regulated by the Financial Conduct Authority in 2014. Because savings are not protected in the event that a P2P lending platform fails, it must be regarded as a risk venture.