Ask 10 people on the High Street where they might best get a personal loan and I’ll wager at least 9 of them will say “The bank”. This is the way it has always been and habits are not easily broken. However, one of the consequences of recessionary times is that it fosters innovation and forces people to be resourceful. One beneficiary of this is peer-to-peer (also called “person-to-person” or “social”) lending.
So what is it and how does it work? Two sets of people in the country right now have problems: savers are getting a poor return on their money (2-3%) and Borrowers are being forced to pay high rates for personal loan (7-8%+). The concept of peer-to-peer lending is that it connects these two types of people and prudently mediates between them. Savers get a better return and the Borrower gets a better loan rate while the whole process is seamlessly managed by the peer-to-peer lending agent in the middle such that privacy is protected and risk is diversified among several lenders. As a Saver/Lender you are exposed to no more than about £20 per individual Borrower and as a Borrower all you see is one monthly repayment as you would with a normal loan. The only people who lose out are the bankers who would normally be the middleman in this transaction. Pass the Kleenex.
Does this sound new or different? Well, it shouldn’t. Peer-to-peer lending has been around in the UK since 2005 when a bunch of guys from the old Egg bank set up Zopa, now the market leader in the peer-to-peer personal loan market. Since then Zopa alone has arranged over £175m in loans – that’s right £175 MILLION* – and they have seen phenomenal growth since the recession began and credit tightened. Indeed, January 2012 was their busiest month ever when they arranged over £8m in loans. In the last 2 years there have been other entrants to the market too with Ratesetter being the most notable in the personal market, having arranged over £16m* of loans since they launched in October 2010.
And the concept has spread too to the commercial market where Funding Circle have started offering unsecured loans of up to £100,000 (and secured loans up to £250,000) to UK businesses as well. Since their launch in August 2010 they have lent to over 600 businesses in a total of more than £24m – think of the jobs this money has saved and the revenue it will generate for UK business and one can only laud their efforts.
But is this risky? In this nascent industry the incumbents have been very careful to protect their reputation in this regard. Borrowers are rigorously scrutinised and default rates monitored closely. The fact that market leader Zopa’s default rate is less than 0.9%, second placed personal lender RateSetter is a mere 0.2% and leading commercial lender Funding Circle’s is just 0.3% (but as the latter two have only been going since Oct 2010 and Aug 2010 respectively, these number needs to be viewed in that context) suggests that risks are low and given that each Saver’s money is split between, literally, hundreds of borrowers, the process is managed prudently.
So on paper this is a great idea, right? Savers earn more, borrowers get better rates and there’s a side of Banker-bashing to boot – everybody should be doing this, right? Well, they’re not. Peer-to-peer lending accounts for about 2% of all personal lending in this country so there are still a lot of people out there who don’t know about it. For this reason we’re keen to get the message out.
If you’re a personal borrower Choice Loans can offer you access to either Zopa or Ratesetter from our Personal Loans page. We are also an approved introducer for Funding Circle and you can contact us for a Commercial loan here
* Data accurate as of Feb 2012
