You are here: Home - Saving & Banking - News -

Bypass the banks

0
Written by:
06/02/2012
Giles Andrews, CEO and cofounder of Zopa, tells us why peer-to-peer lending is gaining impetus in the UK.


Since the banking crash of 2007, something rather wonderful has come of age. It is called peer-to-peer (p2p) lending – a new way ‘to do money’ that actually bypasses the banks and allows individual people to lend and borrow money between themselves, at rates that they agree, without a banker in sight. 

It is a great example of necessity being the mother of invention – even if it predates the banking crisis.

Just as banks slashed savings rates and almost stopped lending, p2p lending has made millions of pounds available for loans to creditworthy folks, while paying those who lend a return on their money in a different league from the dismal and increasingly sub-inflation rates paid by the banks.

Good tradition
So what is peer-to-peer or ‘p2p’ lending?  In its broadest definition it is of course as old as the hills – and actually older than banking itself.  For thousands of years people have lent money to other people, whether within families, tribes, villages or working environments. 
But in its modern guise, it is an online service, which allows the connection between people to be much more distant, virtual, even anonymous. Although the nature of financial regulation ensures that each p2p lending business is constrained to within the boundaries of its home country, that is its only limitation in reach.

So unlike credit unions, which do have some conceptual similarities, membership of a p2p lending group can be much wider – theoretically the entire population of that country.
P2p lending works through the marketplace concept. 

The p2p lending website is where the two sides of the transaction – people with spare money to lend for a return, and creditworthy people who want to borrow – come together and do business at a rate they agree between themselves.

Although the business models and propositions vary considerably across the more than 40 p2p lenders set up across the globe, most offer some level of credit and affordability checking of would-be borrowers.

This is vital to ensure that lenders – who are ordinary people, not credit experts – are not taking excessive or unknown risks in lending via these marketplaces.  
This is the pivotal difference between p2p and banking. Banks take the customer’s money into their business – on to their balance sheet – and agree to pay a rate of interest on that money.

At the same time, they lend that money out to other people at another higher rate, but there is no direct linkage between the bank’s savers and borrowers.

The size of the difference or ‘spread’ is entirely at the banks discretion and is the measure that determines the relative strength – or weakness – of the offer.
Since the worst moments of the banking crisis, these spreads have hit record levels, as the banks seek to profit by paying out interest at very low levels (also driven by very low Bank of England rates) while charging very high levels of interest on loans.

Recent analysis by Moneyfacts shows that the average spread between savings accounts and personal loans is currently 11% or more. Savers are getting around 1% interest on average, while borrowers are paying around 12%, creating a spread of 11%.

Spread a little happiness
These very large spreads have undoubtedly helped the p2p lending concept attract significant media and consumer attention, as the much lower charges taken by these new marketplaces ensure that both the borrower and lender end up with a far better deal.   

  
The very first p2p lender anywhere in the world was Zopa.com, built and then launched in the UK in March 2005. In the Zopa model, all borrowers are checked very thoroughly through credit agencies and if of sufficient quality are placed in one of five ‘markets’ (A*, A, B, C and Young) based on the risk level they represent. 
Lenders then make offers into those markets of how much they are prepared to lend, over what term and at what interest rate. The technology carries out the matching process, assembling the best value loan for each individual borrower from the money offered by lenders on the marketplace, while spreading each lender’s money across at least 50 different borrowers to spread risk. 
If the borrower likes the rate they accept it, and that money is immediately ‘put aside’ for them. Further borrower checks are made at that stage – mainly to check that the borrower can readily afford to repay the loan – and if successful the loan is made at the rate originally offered.

Capital and interest payments are then made by direct debit from the borrower back to the client holding account where the payments are allocated to each of the borrower’s many individual lenders.     
More than six years after launch this first p2p model is proving very successful. More than £150 million of loans have been arranged, at rates agreed by borrowers and lenders between themselves through the marketplace.

Stringent credit and affordability checks have kept the loan default rate below 1%, while borrowers have secured interest rates at typically 20% lower than the best they could have got from a bank. Over the last 12 months, those lending through the Zopa markets have enjoyed an average return from their lending of 6.7%, after charges, but before any bad debt and personal taxation. 
In terms of market share, Zopa loans now represents around 2% of the new unsecured personal loans taken out in the UK. 
In commenting on the growth of the p2p lending market, bankers have been dismissive so far, mainly because in terms of relative size, the new players are very small.

However, consumer bodies and the Government have been much more positive and have welcomed this new innovation as just the sort of new competition that is necessary to apply pressure on the UK’s huge banks to operate more efficiently and far more in the interests of their customers.       

 

Tag Box

Debt

Pension

Spending

Financial fitness

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Which ISA is right for you? A round up of the six products available in 2017

From cash to innovative finance to lifetime, here's our guide to the ISA products available to savers this yea...

Guide to buy-to-let tax changes

In late 2015, former Chancellor George Osborne announced a range of  tax measures aimed at landlords, which t...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Five fund tips for a 0.25% interest rate environment

With interest rates stuck at a record low 0.25% and expectations rates could fall to close to zero, here are ...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Investing your money

Alliance Trust Plc gives you smart insight into how to invest your money

Money Tips of the Week

Read previous post:
University challenge

Three top financial advisers offer their suggestions for parents looking to save for their childrens’ further education.

Close