Many cynics said peer to peer lending would never work in the UK; but with savings rates from banks and building societies stuck firmly in the doldrums for the foreseeable future there’s growing evidence that this new sector is starting to become very attractive to consumers.
With traditional savings rates having fallen by more than forty per cent in the last two years, returns on offer from the peer to peer providers are looking more tempting than ever.
Compared with mainstream banking, peer to peer may still in its formative years with Zopa, launching as the UK’s first peer-to-peer marketplace in 2005, but a continued lack of respect for the UK banking sector and rock bottom savings returns has seen the peer to peer market flourish.
Zopa remains the biggest player and to date having arranged more than £612 million in loans over the last eight years and now has over half a million members on its books. The projected return after any charges and defaults is currently up to 5.2%.
Another key player in the peer to peer sector and acting as the middle man for individual savers and borrowers is RateSetter.
Launched just under 4 years ago RateSetter may be considered a relative newcomer, but has already matched over £330 million for its lenders and borrowers, with around £250 million of this achieved in the last 18 months alone.
RateSetter currently offers a range of lending options (for savers), paying 3.5% fixed for a one year bond up to 6.1% fixed for a five year income bond.
It’s not surprising that they’re seeing a spike in business when you realise that the equivalent best buy savings bonds from the banks are paying just 1.85% (Kent Reliance) and 3.20% (Shawbrook Bank) respectively.
There is even a monthly access account paying 2.3% – and if you’re a little nervous or unsure if this is right for you, you can dip your toe in the water and try it out with a minimum deposit of just £10.
However, consumers shouldn’t see this alternative banking concept as a soft touch, as a strict credit scoring regime is absolutely vital to ensure defaults are kept to a minimum to give people confidence to continue to deposit their savings with the peer-to-peer companies.
RateSetter for example states that fewer than 15% of loan applications ware approved, so whilst it may offer a simpler and fairer way to borrow money, if you don’t have a top notch credit profile you’re going to have to find your finance elsewhere.
One of the main concerns with people depositing their cash with peer-to-peer providers is that although the returns far outweigh those paid by the banks, they don’t offer the cast iron guarantee to savers that bank customers enjoy under the Financial Services Compensation Scheme.
Even though tough credit scoring criteria is in place, there is still an element of risk, albeit very small, that you don’t have with a bank or building society.
As long as you fully appreciate and are comfortable with this, lower overheads of not having to run a nationwide network of branches, means you can obtain better returns on your cash in the peer-to-peer market.
Providers have their own methods of trying to mitigate the risk to depositors. RateSetter for example offers a ‘provision fund’ which is built up from borrower fees, and reimburses lenders in the case of late payment or default. This safety net has ensured that to date, every penny of capital and interest has been returned to every single Lender. Zopa now operates a similar model with its Safeguard feature.
Peer to peer is here to stay and as long as providers keep rates competitive and bad debt levels under control, the forthcoming regulation pencilled in for this spring means there’s every chance P2P will become an even bigger thorn in the side of the high street banks – isn’t it time to take a closer look?