In line with Uber and Airbnb, peer-to-peer lending has revolutionised the way that we borrow money while creating investment opportunities for those looking for better interest rates than those offered by banks.
Peer-to-peer lending platforms offer an opportunity for consumers to borrow money quickly and conveniently at low interest rates. It also offers those looking to invest their money an opportunity to higher returns than those provided by typical savings accounts.
Peer to peer lending platforms simply work as brokers between those that want to invest their money and those who want a loan. In the UK there are 3 major P2P lending platforms but new smaller platforms have also emerged and are offering competitive loan options.
The history of peer-to-peer lending in the UK
P2P platforms started operating in 2005 when the UK’s first of it's kind, Zopa was launched following which RateSetter and Funding Circle was inspired and launched. Zopa was founded by three members who were at the time of creating the platform, employers of an online bank called Egg.
These three P2P platforms are still the leaders on the UK market and have consistently developed their services and their platforms to remain in the lead and offer both lenders and borrowers great value.
Not only have they secured Government backing and have become completely regulated as of 2013, they have managed to keep on innovating to keep thing competitive and stay ahead of banks and other credit providers.
Interestingly enough, once the peer to peer lending industry become regulated in 2013, many more investors and borrowers, who were clearly comforted by the new found regulations, decided to invest and borrow from these platforms. This essentially set a new standard in the industry and certainly propelled the existing platforms forward.
The impact that P2P lending has had on the banks
P2P lending has undoubtably has an effect on profits earned by the big banks but, more than reducing profits they have also played an important role in increasing competitiveness, to the benefit or borrowers and investors. This was achieved by forcing banks to lower their interest rates on loans and increase their savings interest rates to remain competitive with these peer to peer lenders.
Another more unknown impact that P2P lending has had on the big banks is that they have pushed them to innovate in terms of their online banking and online services while reducing their physical locations.
P2P lending for those looking to invest
Peer-to-peer lending allows people to invest their money online in a manner that offer a stable, secure and better-than-bank savings returns. Investing your money on a P2P platform will depend on the individual platforms policy as each have a minimum investment amount and have various options when it comes to reinvesting and drawing returns.
LendingWorks for instance, offers investors a fee-free early exit option if you wish to withdraw your investment prior to the agreed term. This is referred to as their “Flexible” investment option and also allows one to start investing with as little as £100. This may be ideal for those that require a slightly more flexible investment option and easier access to funds or improved liquidity.
Advantages offered by P2P platforms
- Peer-to-peer platforms are much more forthcoming with their lending and borrowing information and it is this transparency that cannot be matched by banks
- They generally offer better than banks returns for investors with low risk since the industry is regulated and all P2P platforms are required to abide by certain minimum reserve standards
- P2P platforms offer lower rates for borrowers, particularly those looking to secure unsecured personal loans
- Peer to peer platforms have quick, simple and convenient online loan application processes and are able to process loan applications with speed and accuracy
- Many P2P sites offer quick quotes that do not require a full application or a credit check, a soft search will suffice
- Some P2P loans allow you to repay your loan in full prior to the conclusion of the full loan term without any penalty fees, while some banks may offer this, many still do not
The UK’s leading P2P lenders
Peer-to-peer lender Funding Circle
Funding Circle is a peer-to-peer lender that specialises in offering P2P loans to UK businesses. They are big on innovation and have provided small business loans to over 80,000 businesses across the globe. They offer business unsecured loans that range from £10,000 to £150,000 with loans terms between 6 months and 5 years.
As the original peer-to-peer lending platform, Zopa still leads with their personal loan offers and have to date funded over £5 billion worth of loans. They offer borrowers loans from £1,000 to £25,000 with loans terms ranging from 12 months to 5 years. Zopa has partnered with Equifax and use them to calculate borrower’s ratings.
RateSetter offer both personal loans from £3,000 to £25,000 and business loans from £25,000 to £500,000 as well as property development loans up to £10 million. They have to date funded more than £3,6 billion worth of loans and are still, since 2010 one of the leading P2P lenders on the market with over 80,000 active investors.
Should you choose a P2P loan over a bank loan?
While we can all agree that peer to peer lenders have got quite a handful of advantages over mainstream banks, choosing a P2P loan over a bank loan is not always the best idea.
This is because banks have, and still do, offer personal and even business loans and business finance solutions that offer many more benefits. Banks are able to offer customers loans at competitive rates as well as other complimentary products and service which make it easier for their customers to operate and even save.
When comparing loans you should always have a look at what the P2P lenders are offering but also consider loan options from banks and other lenders, especially if there are any terms that you deem to be crucial to setting up the most ideal loan product for you.
These terms may include a more flexible repayment approach or redraw facilities among many others. It is important to note that P2P platforms require borrowers to have a good credit rating or a reasonable rating in order to approve them for a loan.
The platforms will run a credit check and establish your credit record prior to approval. While those with a low credit score may be declined, those that are approved will have to settle for a higher interest rate.
General tips when comparing loans
- Make use of the APR of the loan or the comparison rate and not the prime interest rate advertised to compare costs.
- Consider any loan application or establishment fees.
- Ensure the lender offers the loan term that you desire.
- Check the lender’s approach to early settlement on loans and ensure you are aware of any fees.
While P2P loans have revolutionised the lending industry in the UK and the world, there is still plenty of room for growth with banks still having a definitive majority in terms of market share. Whether you’re looking to get a loan online or invest your money, peer-to-peer platforms can offer you just what you need.