Peer to peer lending is when somebody uses their savings to lend to other individuals, consequently getting rid of the requirement for traditional banks to be involved.
The aim is that anyone who wants to lend money can get a much better return on the money which they have saved over the years than they would with a saving account at a high street bank, and in turn the individuals they are lending the money to could get lower cost loans than they would if they borrowed through a bank.
Numerous websites that provide peer-to-peer loans lend to small local businesses as well, which for many has proved very useful due to tight restrictions on banks lending.
As a loan provider, you can select your rate of return based on the time you want to invest your hard earned cash for and the risk you are prepared to take. For instance, if you want to lend your cash to people who have got the best credit history you’ll make less money than if you were prepare to lend to a higher risk group.
There are fees and charges though these are usually already factored into the rate you see, advertised, this is worth checking though.
Anybody who is 18 years old and who is a legal UK resident, has a UK current account and is not lending in the course of a business can usually become a peer to peer lender. You don’t need to lend large sums to invest either, most peer-to-peer investments start from as little as £10.
With the current interest rates, peer-to-peer saving is proving to be increasingly popular, because they provide one of the very few methods for savers to potentially generate returns that could beat inflation. Peer to peer returns can be significantly higher than those provided on a lot of savings accounts supplied by traditional banks, and are fixed for the loan period, which can be over a period of three to five years.
In order to minimise the risks on any money you lend can generally be split over numerous credit-checked borrowers in small chunks. Therefore if someone does not keep up with their payments, it doesn’t mean you will lose all of your money. Some peer to peer businesses run their own schemes that guarantee to return every penny to investors through a Provision Fund which borrowers contribute to by way of a credit rate fee which is charged at between 0. 5 % and 3 % of the loan.
To give extra protection, most peer-to-peer plans hold Consumer Credit Licences provided by the OFT and use the same processes and fraud prevention systems as traditional banks on the high street have in place, however you should always ask what security is in place prior to becoming a peer-to-peer lender.
The downsides which are associated with peer-to-peer lending are related to the risk factor of peer-to-peer lending. The peer to peer provider runs the risk of the borrower defaulting on the loan and the lender is locked into the interest rates for the term of the loan. Also, the loan provider could be dealing with borrowers who have been turned down by traditional banks, regardless of circumstances.
The borrower has the risk because private loan providers do not have to satisfy lending rules. There also are differences in everything from credit agency reporting policies to exactly how they share your personal information, so make sure you research the lender/company thoroughly before going through with one of these loans.
Lastly, the rate of interest for repayment of peer to peer loans may be higher than if you went to a traditional bank, although sometimes they are matching or much better for unsecured loans.
The apparent cost is the interest and charges. Just as in the mainstream, peer to peer loan providers offer rates of interest based on credit worthiness. Rates can vary between 6.8% and 20% and peer to peer lenders are not always more affordable than banks.
Another obvious risk is a peer-to-peer lending site going bust. A website investors are not protected by the Financial Services Authorities compensation scheme. Peer to peer lending sites do make their very own arrangements to safeguard clients if they go out of business.
The deals made between lenders and borrowers are lawfully binding and stand apart from the sites. For that reason, even without the peer-to-peer websites involvement, peer to peer lenders can continue to get payment and the people who have lent the cash would have to continue to settle their loan, and at the rates agreed at the start of the agreement.