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P2P lending (or peer to peer lending) is increasing in popularity.
The process involves private lenders being matched with borrowers, in a scenario that doesn’t involve banks or large corporations.
Whether they are tempted by the financial details or by the option to bypass big business, more and more people are using P2P finance.
The history of P2P lending
In its broadest sense, peer to peer lending has always been around.
This is the simple act of a parent lending money to their son or daughter, or one friend borrowing money from another.
In recent years, lenders have discovered a new way to build on this type of lending. It allows people to lend money to strangers, earning interest on their invested funds.
Many P2P lending platforms have been launched to date. They include Zopa and RateSetter. The platforms take on a crucial role, managing the loans and carrying out affordability assessments. There are risks to these transactions, but they are reduced by going through an authorised lender.
The UK’s first P2P lender was founded in 2005. In its first 3 years of trading, Zopa managed loans totalling £20 million. Since then, the popularity of P2P loans has grown considerably.
By 2013, the Bank of England reported that the industry was worth £378 million per year.
In 2015, P2P loans totalled more than £3 billion.
How P2P lending works
P2P lending is essentially crowdfunding for finance.
Crowdfunding allows many people to contribute to something. A crowd of individuals pool their resources into a larger fund.
Also, this kind of fundraising can be seen on sites like Kickstarter. This is where investors put their money towards a project that they are interested in.
In the case of P2P lending, the project is someone else’s loan. Money is sent from individuals to individuals, or small businesses, with the P2P lending platform working as a middleman.
P2P loans from the borrower’s perspective
If you borrow from a P2P lender, the funding comes indirectly from other people like yourself. Almost anybody can invest spare capital in P2P loans. Your chosen lender acts as the middleman. As a result, running affordability assessments and managing the loan and repayments.
It is unlikely you will experience much difference between borrowing from the bank and from a P2P lender. The experience of receiving money and paying back will be very similar. However, interest rates can be lower.
The UK’s leading P2P lender is Zopa, offering 9.9% APR on a £1,000 loan in late 2016. In comparison, a £1,000 loan from Natwest comes with an APR of 24.9%. This is not always the case, so it is best to shop around before applying for a loan.
P2P loans from the lender’s perspective
You can be involved in P2P lending from either side of the deal.
From a lender’s perspective, the returns can often be better than with savings accounts. However, capital isn’t covered by the Financial Services Compensation Scheme. There is a level of risk involved, as is the case with many investments.
With P2P lending, individuals can invest their funds in loans for other people.
The transaction is not direct. Investors are protected from complete financial loss. Because their money is split and sent to many different borrowers. This means that many lenders make small contributions to a variety of loans.
If one borrower cannot repay their loan, the impact is a small one on many different people. This reduces the level of risk, as nobody should ever lose all their money at once.
Money is automatically distributed to borrowers. Investors do not need to micro-manage their loans, once the investment has been made.
Who offers P2P lending
Zopa was the first company that offered P2P loans in the UK. It is the world’s oldest P2P lending company and the biggest in Europe.
Founded in 2005, Zopa had processed more than £1.8 billion of loans by 2016.
In 2015, Zopa lending totalled £485 million.
With Zopa, lenders can invest as little as £10. Zopa has more than 53,000 lenders investing their money. Some have more than £1 million invested.
Borrowers can request anything from £1,000 to £25,000. These are large value loans, more suited to mid-term or long-term borrowing. Money can be borrowed over a maximum of 5 years. The average loan size is £7,300.
Launching in 2010, RateSetter quickly became one of the biggest names in consumer P2P loans.
Investors have contributed more than £1.5 billion to RateSetter loans. There are more than 47,000 registered lenders, averaging an investment of just over £21,000 per person.
In 2015, RateSetter loans totalled £653 million per year to individuals and business customers.
RateSetter is also involved in providing credit options for buyers. If you buy a new mobile phone on credit from GiffGaff for instance, then you could be borrowing the money from RateSetter.
Assetz Capital is an up-and-coming P2P lending platform.
Instead of providing commercial loans, this platform covers mortgages, renewable energy loans and SME loans.
If you need money for a new car, this is not the platform to choose. If you are looking for serious levels of investment for property development, Assetz Capital may be more suitable.
From 2014 to 2016, the lender processed £170 million of loans.
Most P2P platforms allow investors to create an online account, log in, deposit money and manage their investments. They can put money in, or take it out, at any time. They can even set your own interest rates.
The Assetz Capital platform is a slightly different creation. Investors choose an account type in the same way that they would select a bank account, deciding what level of access they need. Interest rates are set by the platform. Although they are still significantly higher than many bank-based savings accounts.
The Funding Circle
Founded in 2010, Funding Circle was the first P2P loan provider specifically for businesses.
To date, Funding Circle has been involved in £1.6 billion of lending transactions. They have also received money from the UK Government, who have used the platform to invest in small business.
More than 55,000 lenders are investing their money through Funding Circle. Furthermore, with more than 20,000 businesses benefiting.
Banks are working with Funding Circle, rather than against it. If Santander cannot approve a business loan, they will direct the applicant to the P2P lending platform.
Investors can manage their money online, or choose to automate the process if they’re happy to.
Smaller than other P2P consumer loan providers, but steadily growing, Lending Works was founded in 2012. But, it did not go through a full launch until early 2014.
This was the first lending platform to provide insurance for investors, in the form of the Lending Works Shield. This includes a reserve fund, default insurance and fraud insurance.
Other P2P lending platforms
The platforms listed above are not the only options. Many other P2P lenders have emerged. And, they offer everything from consumer loans to crowdfunded real estate investment opportunities.
Safety and regulation of P2P loans
Like other lenders, providers of P2P loans are regulated by the Financial Conduct Authority. The FCA ensures that lenders are acting fairly and responsibly.
Before applying for a loan, it is important to check the Financial Services Register. This lists regulated and approved lenders, providing peace of mind for borrowers. Any approved P2P lending platform will feature on this register.
For investors, there is of course peace of mind. It comes in the form of pots of money such as Zopa’s Safeguard and RateSetter’s Provision Fund, as well as the Lending Works Shield. Reserved money is accessed when a borrower defaults on a loan. As a result, investors continue to receive the returns they’ve been expecting.
P2P lending platforms are not covered by the Financial Services Compensation Scheme (FSCS). This means that they cannot offer complete protection. Despite this, the main lenders report a 100% success rate by late 2016.
Applying for a P2P loan
A P2P loan may be right for you, if you need a larger sum of money (usually upwards of £1,000) and have been turned down by traditional banks. It may also be suitable if you want to avoid dealing with banks, instead of contributing to the investments of individuals like yourself.
You can apply for a loan online if you meet the lender’s minimum requirements.
You can also manage your loan online, with many lenders offering the option to repay your debt early.
P2P loans are a traditional loan alternative, with options for borrowers and investors.