Peer-to-Peer loans is a new form of lending which has become popular on the financial market, since it first took off a couple of years ago. If you've got some spare, unused cash which isn't accumulating much interest in the bank, lending via a peer-to-peer loan could help make you a few extra quid at minimal risk.
What is it?
As the name hints, money is exchanged directly between two parties. In practice, this means it removes the need for the financial institutions which normally govern loans. It's suitable for both individuals looking to borrow money, as well as those looking to loan money out. And as there's no banks, or institutional lenders involved, those looking to borrow can enjoy lower rates than they might get on a loan elsewhere. Whilst those looking to loan money out can expect a higher rate of return than they'd get in a savings account etc. To balance this out, there's a slightly increased risk in that there isn't a 'disaster' plan in place like with the 'Financial Services Compensation Scheme' for banks, but the industry is legislated and there are a number of safeguards in place to protect your investment.
How does it work?
Loan agreements are generally operated by peer-to-peer websites such as Zopa and Funding Circle, who act as an intermediary- putting you in touch with a community of members of which you can loan money to or from. It's effectively a marketplace, where you can compare rates - as well as member ratings and reputations/feedback, very much like you would find on ebay.
The sites act as safeplace for investors, and mediate any disputes in the event of problems. Naturally, they take a fee for this, which varies by provider.
Lending Money Through Peer-to-Peer Websites
All sites have their own quirks in how they position themselves on the market. Due to the current popularity, there are now a number of smaller companies popping up, but we will list the three main ones here.
- Zopa Zopa is the largest with over 40,00 members and counting. It charges members 1% fee for each year of the loan and has an unlimited load amount. For those looking to loan money it works a bit like a bank saving account; you choose how much you want to 'save' and how long to have it tied up for. The site operators then spread your money out over different loans to minimise the risk for you. To protect any money deposited, Zopa has a scheme called 'safeguard', which is basically a compensation fund, to cover any bad debts that arise as a result of late or missing payments.
- Ratesetter Ratesetter is similar to Zopa in that it presents itself to lenders like a traditional bank savings account. The operators also have an emergency fund set up to cover any non-payers, which is something a lot of the new, smaller sites have so far neglected to do. Fees are slightly different to Zopa, in that Ratesetter charges 10% on the profit of any money made from loaning out your cash.
- Funding Circle Funding circle has a feel of a crowd funding site, allowing you to scope out individuals and businesses and loan them money based on what they're proposing. Despite the great rates, this is perhaps a higher risk for most as you won't be spreading your money between many different customers. To date, Funding Circle doesn't have a compensation scheme in place, but it doe s mediate debts on its’ member behalf, commencing court proceedings where necessary.