Peer-to-peer (P2P) lending has been around for a few years but it is only now that the market has really started to experience major growth. According to AltFi, a P2P news and analysis site, the market has seen 50% growth within the last 5 months. The first P2P lending site emerged in 2005 when Zopa launched its platform in the UK and more have followed since then across the US and UK and several in Europe. Borrowers unable to access traditional loans and savers disappointed with low interest rates have both looked to an alternative to meet their needs.
What is P2P Lending?
The basic idea of P2P is that in links those that want to borrow money with those that want to lend – without going to a traditional bank or lending institution. There are two categories of P2P lending- consumer and business. According to the P2P Finance Association (P2PFA), both types of lending accounted for 79% of the alternative finance market in 2013 – with business lending worth £193m and consumer worth £287m.
Each platform will vary but the concept generally similar. Investors sign up and deposit the minimum required amount – £10 to £25,000. Borrowers must go through a credit check that can be done by an agency and/or the platforms own credit assessment process. Loans range from anything as low as £250 to as high as £250,000.
Platforms offer varying ways of investing, whether by a portfolio of small loans to spread risk or the ability to pick and choose the best rated loans individually, there are plenty of options, you just need to find out why you may be better getting installment loans over others. Some platforms may have specialist services to help protect investors against default, such as provision funds or capital assurances.
Regulation
From 1st April 2014 the Financial Conduct Authority (FCA) took over regulation of consumer credit, which includes the lend-to-save market. But note that money lent through this market is not protected under the Financial Services Compensation Scheme (FSCS). Regulations require platforms to hold capital reserves of £20,000 and this will increase to £50,000 in 2017. They also require platforms to have a third party (nominee) in place to hold the loan should the company should go under.
The P2PFA is the self-regulation body for alternative finance. They aim to promote high standards of business conduct and consumer protection by firms adhering to a set of standards. Most of the UKs largest platforms are members and must meet these standards in order to join.
Considerations
Many investors and borrowers are seeing the benefits of avoiding the high street banks, but that doesn’t mean that they are always able to capture the full benefits. Platforms charge fees for their services and borrowers may be subject to much higher interest rates if their credit score is low. Investors should look to trusted, well-established platforms with low default rates in order to find quality borrowers.
Outlook
The future of P2P lending is extremely bright as more competition enters the market. However as the economy starts to recover, borrowers finances improve and interest rates inevitably rise, it is unclear how many consumers will choose to stick with traditional banks rather than embracing this new form of finance. One thing is for certain, this market is making waves among established high street names and savvy investors should definitely take note of the opportunities out there.