Peer to peer lending is the practice of borrowing and lending money between individuals across an online exchange. It is also known as social lending and is becoming a rapidly growing industry.
In the past year alone, the sector has seen over 200% rise in activity. More than a billion pounds go through the peer to peer lending system on a monthly basis.
Borrowers get to take out loans for varying time periods and at a range of rates depending on circumstances. The interest rates paid to lenders are slightly higher than what banks pay; lenders typically enjoy rates of return from between 2- 5%. The products on offer with peer to peer lending are differentiated by term. The longer the term the higher the return you can expect on your savings.
The risks are also higher with this type of lending. It is important to know that these financial transactions are not covered currently under the UK’s financial regulators. This will not be the case next year however, when they will also fall under regulations set by the authorities.
A major risk can be the potential for a lender’s money to end up in bad debt, thereby losing them what they have invested. This is a concern for many people as with banks at least money is safe. To fight this concern however, some peer to peer lending companies such as RateSetter do offer lenders a provision fund. This is a pot of money set aside to cover any late repayments or defaults by borrowers so every lender does get their money back.
The 3 biggest companies in the peer to peer lending market currently are Zopa, RateSetter and Funding Circle.