Peer-to-peer lending challenges tigh-fists banks

More Britons than ever are circumventing the banks through peer-to-peer lenders, in a bid for higher returns on their cash and better borrowing deals. And the trend is likely to continue, writes www.money-marketuk.com editor Julia M Thompson.

Peer to peer lending is when those with money lend to those who need it. It allows consumers to bypass the banks - lenders get a better return on their cash, while also controlling their risk, and borrowers can get their hands on the money they need at more favourable interest rates.

For peer-to-peer (P2P) site RateSetter, the figures speak for themselves. In just over four months of trading, it has matched a little over £2m in loans at an average £4,300 per loan. Annual returns for lenders for monthly access stand at 3.6 per cent and for a three-year fixed loan, returns to l enders have been 7.8 per cent a year.

Rhydian Lewis, CEO of RateSetter, says: “The market for peer-to-peer lending is operating in something of a perfect storm.

“Low returns for savers in conjunction with public dissatisfaction with the banks means that creditworthy individuals and shrewd savers alike are looking for alternative investment opportunities.”

Heavyweight Zopa.com pioneered P2P borrowing and lending worldwide when it launched its website in 2005, urging ordinary people to bypass the banks and lend to other consumers at rates they agree between themselves.

With no bankers, says Zopa, both borrowers and lenders get a much better deal. Its total lending has rocketed to £121m and average annual returns, after fees and before bad debt, are 7.8 per cent over the last 12 months.

“We have demonstrated that consumers get a great deal out of peer-to-peer lending both from the lending and borrowing side. We are very real competition to the banks in the unsecured marketplace,” says Zopa founder and CEO Giles Andrews.

With Zopa, borrowers enjoy rates some 20 per cent below the best they can get from a bank, and its default rate is at the lowest level of any personal loan book in the UK – just 0.7 per cent as at January 2011.

Lenders can spread their cash across at least 50 borrowers provided they lend more than £500 in total.

But there are some caveats. P2P sites are not usually regulated by the FSA (Financial Services Authority) and are not part of the Financial Services Compensation Scheme.

“The potential higher interest rates are not totally risk-free – most peer-to-peer lenders are not currently regulated by the FSA and there’s no 100 per cent guarantee that you’ll get your money back,” says Andrew Hagger from moneynet.co.uk.

As an investor, says Hagger, if tempted by returns of 6 to 9 per cent, “don’t put all your eggs in one basket. Perhaps test the water with an initial investment and see how it performs.”

“We currently only approve approximately 12-13 per cent of borrowers – our Lenders are getting exactly what they’ve asked for: creditworthy borrowers that the banks would like to lend to,” said Alex Gower from RateSetter.

The success of trend-setter Zopa has sparked a clutch of new sites in the last few years – RateSetter in 2007; Fundingcircle.com, Yes-secure.com and Quakle.co.uk in 2010. Fundingcircle says it will only allow established and creditworthy businesses to borrow.

But with the expected rise in P2P business and new sites, both Zopa and RateSetter think there is need for tighter controls.

Gower says: “We believe that the peer-to-peer market needs more regulation to protect itself from unscrupulous operators entering the market.

“However it’s important to recognise that we do not operate as a bank: we facilitate direct loans between lenders and borrowers, and manage the legal and financial processes for our clients.”

So banks, beware, as consumers challenge your services. “There is no reason why peer-to-peer lenders couldn’t take half of the UK market,” says Zopa’s Andrews.

Comments

[TCF Online Banking]

We believe that the peer-to-peer market needs more regulation to protect itself from unscrupulous operators entering the market.

[forex affiliate program]

I agree. The peer to peer market should be more strict and implement tighter regulations for security.