Money Insider: Peer-to-peer lending up as rates languish
Friday 01 March 2013
Many people were sceptical about peer-to-peer lending and questioned whether it would ever take off in the UK, but with savings rates from banks and building societies suddenly hitting rock bottom this new sector is becoming increasingly popular.
With traditional savings rates having fallen by more than a third in the last six months, returns on offer from the peer-to-peer providers are looking even more attractive.
Compared with mainstream banking, this new breed of finance is still in its formative years, with Zopa launching as the UK's first peer-to-peer marketplace in 2005.
However, a continued lack of confidence in the British banking sector, combined with high borrowing rates and poor savings returns, has seen the peer-to-peer market flourish, with more providers entering the industry in the last couple of years.
Zopa remains the biggest player and to date has arranged more than £277m in loans during the last eight years and now has over 500,000 members on its books. The average return paid to lenders in the last 12 months after any charges and defaults is an impressive 5.4 per cent.
Another major player in the peer-to-peer sector and acting as the middle man for individual savers and borrowers is RateSetter. Launched in October 2010, RateSetter may be a relative newcomer, but is growing fast. It has already matched over £57m for its lenders and borrowers, with more than £40m in the last 12 months.
RateSetter currently offers a range of lending options (for savers), paying 3 per cent fixed for a one-year bond up to 5.8 per cent fixed for a five-year income bond.
It's not surprising they're seeing a spike in business when you realise that the equivalent best-buy savings bonds from the banks are paying just 2.31 per cent and 3.05 per cent respectively.
There is even a monthly access account paying 2.6 per cent – and if you're a little nervous or unsure if this is right for you, you can dip your toe in the water and try it out with a minimum deposit of just £10.
But although the returns currently outweigh those paid by the banks, they don't offer the safety net that bank customers enjoy under the Financial Services Compensation Scheme. In short, that means while your savings are safe – up to certain levels – if your bank or building society goes bust, you will lose your cash if a peer-to-peer lender collapses.
The peer-to-peer market is not solely aimed at personal customers, and with banks tightening credit policy and reportedly extra cautious about lending to small and medium-sized enterprises a new breed of business lenders has emerged to fill the gap, including Funding Circle.
Funding Circle has lent more than £80m to businesses since its launch in 2010, with the average loan at around £40,000. It pools the savings of investors, who have averaged returns higher than 8.8 per cent, while the current bad debt total is around 1.5 per cent.
Consumers shouldn't see this alternative banking concept as a soft touch, as a strict credit-scoring regime is absolutely vital to ensure defaults are kept to a minimum in order to give people confidence to continue to deposit their savings with the peer-to-peer companies.
RateSetter, for example, last year reported that less than 15 per cent of loan applications were approved, so while it may offer a simpler and fairer way to borrow money, if you don't have an excellent credit profile you're going to have to seek your finance elsewhere.
For lenders, even though the tough credit-scoring criteria is in place, there is still that element of risk, albeit small, that you don't have with a bank or building society because of the lack of protection for your cash through the Financial Services Compensation Scheme. But as long as you understand and are comfortable with that, you can get better returns on your cash in the peer-to-peer market.
Providers have their own methods of trying to reduce 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.
The more established the market becomes, the more confidence consumers will have, and if providers continue to keep rates competitive and bad debt levels at current low levels, the peer-to-peer industry will remain a growth area and become more widely accepted as a credible alternative to the banks.
Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk
Under new state pension rules we will all be much worse off
Budget 2015: George Osborne is set to get tough with further cuts in public spending
Bargain Hunter: Our exclusive deal cuts the cost of buying foreign currency by 20 per cent
Simon Read: 'Savers, take action - only £75,000 of your nest-egg will be protected'
Simon Read: 'Taylor Swift tickets purchased on Viagogo were cancelled hours before the concert'
- 1 This is surely the best way to watch Jaws
- 2 Homeless man playing piano in Florida becomes instant online sensation with public performance
- 3 Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
- 4 San Francisco TV news crew attacked by armed robbers during live broadcast
- 5 Greek debt crisis: The photograph that conveys the despair of Greece's elderly
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
iJobs Money & Business
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
Day In a Page
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.