Money Insider: Peer-to-peer lending gathers pace as faith in banks falters

 

Many people doubted whether peer-to-peer lending would ever really gain a foothold in the UK; however, the sector appears to be going from strength to strength and is increasingly accepted as a credible alternative to the banks.

This new breed of finance is still in its infancy with Zopa, the UK's first peer-to-peer lender, still less than eight years old.

A lack of confidence in the UK banking sector since the credit crisis combined with high borrowing rates and low savings returns has seen the peer-to-peer market flourish, with new providers entering the industry in the last couple of years.

Zopa remains by far the biggest player, and to date has arranged more than £200m in loans, including a monthly record of 1,621 loans totalling £8m in July alone – up by 72 per cent on the same period last year.

A more recent player on the peer-to-peer scene, and acting as the middleman for individual savers and borrowers, is Ratesetter. Launched in October 2010, to date it has already lent more than £30m. This year has seen a major increase in demand for loans with applications for funds currently running at about £1m a day and business levels up 45 per cent on 2011.

Along with Zopa and Funding Circle, Ratesetter formed the Peer2Peer Finance Association, a UK trade body set up to ensure that the sector maintains high minimum standards of protection for consumers and small business customers.

The peer-to-peer market is not solely aimed at personal customers, and with banks tightening credit policy and reportedly increasingly reluctant to lend to small and medium enterprises (SMEs), we've seen the emergence of a new type of business lender, such as Funding Circle and Crowdcube.

Funding Circle has lent more than £49.3m to businesses since it launched in 2010, with the average loan at around £39,000. The company pools the savings of investors, who have averaged returns in excess of 8.3 per cent, while the current bad debt is just 0.3 per cent.

Consumers shouldn't see this alternative banking concept as a soft touch, as strict credit-scoring criteria is absolutely vital to ensure defaults are kept to a minimum to give people confidence to continue to deposit their savings with peer-to-peer companies.

Ratesetter, for example, recently stated that only 10 to 15 per cent of loan applications are approved, so if you don't have an excellent credit profile you're going to have to seek your finance elsewhere.

One of the main concerns for 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.

There is still an element of risk, albeit small, that you don't have with a bank or building society. As long as you are comfortable with this, the 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. Zopa for example, will spread your money among a wide range of borrowers, while Ratesetter adopts a different approach by operating a "provision fund" which is built up from borrower fees, and reimburses lenders in the case of late payment or default.

Co-op's tough call on bankrupts

This week, the Co-operative Bank announced that it will no longer allow undischarged bankrupts to open a basic account.

Until Monday, the Co-op, along with Barclays, was one of only two banks which gave bankrupts access to basic facilities.

However, with the rest of the industry failing to play a part in this unprofitable market segment and no response from the Treasury Select Committee to requests for a review of the situation, the Co-op felt it had no alternative but to pull out of the market.

With some 55,000 new, undischarged bankrupts every year, the Government needs to ensure that all existing and new banks play a full and active part in the basic banking market.

Let's hope this shot across the bows on the part of the Co-op will be the catalyst to get key players round the table.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
News
news
Arts and Entertainment
Nick Frost will star in the Doctor Who 2014 Christmas special
tvNick Frost, Natalie Gumede and Michael Troughton step up
Arts and Entertainment
Matthew Beard, Ben Schnetzer, Douglas Booth and Jack Farthing in ‘The Riot Club’
filmReview: Sheer nastiness of Riot Club takes you aback
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week