What is Peer to Peer lending?


Aug 21, 2015
What is Peer to Peer lending?

You may have heard about peer to peer lending and thought nothing more about it, but as savings rates remain low, perhaps this innovative but higher risk option may be worth another look. 

 

This certainly appears to be the case for a large number of over 55s dipping their toe in the water or in some cases diving right in with Zopa, the UK's largest peer to peer lender. Zopa are now reported to have just exceeded lending over £1bn and guess what; 50% of that money came from people over the age of 55. 

Peer to peer lending, also known as ‘crowd lending’ is quite simply the practice of individuals lending to each other without a bank or loan company being involved. Companies like Zopa, Ratesetter and FundingCircle bring unknown individuals together to lend and borrow from each other.

You place your money with your chosen company and they in turn find someone who wishes to borrow it. In return, you get paid interest which is usually higher than you can achieve in a savings account and because the bank is not involved, the person borrowing the money usually also gets a lower rate of interest than if they were to borrow money using the more conventional methods. 

Those borrowing are vetted and credit checked so money isn’t just leant to ‘anyone’, although having said that, your funds are not protected in the same way they would be with your high street savings, under the watchful eyes of the Financial Conduct Authority (FCA). 

The FCA do regulate the peer to peer companies and stipulate that they must be clear about the risks and benefits and not misleading, however they do not provide a safety net should anything go wrong. 

So there is a certain amount of risk involved but in return you will receive higher returns. 

What returns can you expect? 

Zopa is the longest trading peer to peer company; as mentioned since 2005 it has lent over £1bn and has nearly 60,000 customers; an indication that crowd lending is becoming more main stream and attractive to those of us who perhaps are not quite so averse to risk. They are currently offering 3.8% fixed for 3 years and 5% for 5 years, compared to 2% to 3% in a FCA protected savings account from your traditional provider. 

Some regard Zopa as the best peer to peer company, however with new comers Ratesetter and Funding Circle snapping at its heals, it would be worth investigating what each has to offer before parting with your cash. 

There are fees to pay and not all of your money is likely to be lent our immediately, so there could be a period where you receive no interest. Also it’s worth pointing out that if you want to withdraw some, or all of your money, the process is different to a normal savings account so do read the small print. 

Who is investing? 

Zopa recently announced that the 50 plus age group had contributed more than half of its funds, with Giles Andrews, co-founder and CEO of Zopa stating “The ‘silver pound’ has never been stronger. 57% of the £1bn lent by Zopa over the past decade has come from over-55s, a clear sign that P2P is fast becoming a mainstream for people looking for income or to grow their pension pot.

Savvy consumers in this age group have greater freedom to use their disposable income with many looking for a reliable, predictable and low risk return to generate an income from their pension funds." 

59,000 people is a sizeable number however call me old fashioned but for now, I remain one of the millions who prefer the more traditional savings account – never say never though!


Ashley Shepherd is an Over 50s Personal Finance Expert

ashley shepherd

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