Lenders need to relend

June 18th, 2013
P2P Money

There was a recent comment on the P2P money blog suggesting that the interest rates on peer-to-peer companies are misleading.  Here are the full comments:

Peer to Peer lending is not all its cracked up to be and the rates are misleading. If you lend £10,000 for 5 years at 5%, you will receive a fixed payment every month that consists of both capitol and interest. But as the capitol decreases you only get 5% interest on what is still owed. So month after month the fixed payment is more capitol repayment and less interest. Lending with Rate Setter, a £10,000 loan at 5% gives a Net return (after fees) of £11,296. A 5 year Fixed Rate Bond with interest at 2.44% AER will give the same return. The only way to beat these rates is to loan to the high risks borrowers.

This is true, but with peer-to-peer lending, you need to relend your funds as soon as they are repaid.  The major P2P companies all have different mechanisms to enable lenders to do this, and these are detailed on the P2P company attributes as "Automated Lending".  As funds are repaid by the borrower, the lender will need to relend in order to receive the headline interest rate.  If a lender chooses to leave these funds in their holding account they will, of course, only receive interest on the funds actually on loan.

Most P2P loans work in the similar to a regular savings account (but actually in reverse as at the start you have all of your money and at the end you have none).  With a regular savings account you typically lend a fixed amount of money per month.  Lets say, for example, we choose to save £100 in a regular savings account at 5%.  At the end of the year we will have £1,200, but we won't be paid £60 interest (£1,200 @ 5%) as we have not had the full amount on loan for the full year.

While rates have dropped recently, the rates are still in excess of what savers can achieve in classical savings accounts, and while P2P loans do carry additional risk, these are still a good investment, and a fantastic choice for borrowers.

RateSetter and Zopa win Moneywise awards

June 15th, 2013

RateSetter and Zopa were winners in the Moneywise customer service awards.  RateSetter won the overall award for Most Trusted Specialist, and Zopa continued their previous success by winning the Most Trusted Loan Provider for the 4th year in a row.

The fact that these two peer-to-peer companies are taking on the banks and building societies - and winning - is a testament to how far P2P lending has come.  The industry should take note that finance in the UK is changing for the better.

Full story »

1 in 4 could consider P2P lending in 2014

June 5th, 2013

ReBuildingSociety has comissioned some consumer research regarding the future size of the peer-to-peer lending market.  They state that 17% of consumers are already considering investing in P2P lending schemes over the next 12 months, and this could rise to 26% in 2014 when the sector becomes regulated.

This also states that the biggest obstacle is low levels of awareness with 59% of consumers not knowing what P2P lending entailed.

Here is the full statement on ReBuildingSociety's blog.

One in four consider P2P schemes post-2014 FCA regulation

rebuildingsociety.com recently commissioned some consumer research to gauge the potential size of the peer-to-peer lending market. The findings supported our view that the market will grow exponentially post-regulation and below is the press release issued yesterday.

  • 17% already considering investing in P2P lending schemes
  • 768,000 SMEs would consider applying for a loan through P2P lending
  • Lack of awareness biggest obstacle to P2P growth

One in four (26%) people in the UK (or up to 12 million) would consider loaning money to UK SMEs by joining a peer-to-peer lending scheme (“P2P”) in 2014 when the sector will be fully regulated by the Financial Conduct Authority (“FCA”). This is according to a new study by rebuildingsociety, a peer-to-business lending website that connects SME borrowers with lenders looking for better returns than those offered by savings accounts.

rebuildingsociety’s research also shows that 17% (or up to eight million people) would currently consider P2P lending over the next 12 months, without the need for additional regulatory protection. However, the added security should reinforce the sector given money lent through P2P is currently not covered by the Financial Services Compensation Scheme (“FSCS”) and lenders could lose cash if borrowers default.

Peer-to-peer lending – also known as person-to-person lending, peer-to-peer investing and social lending – is the practice of lending money to businesses or individuals online. The sector is set to boom with as much as £12bn2 to be lent through SME P2P schemes annually, roughly a tenth3 of total mainstream SME bank lending in 2012.

The new study also underlines the attraction of P2P schemes to small firms as around 24% (or 1.2 million4) believe they will struggle to access finance in the next 12 months. Given this, 16% of small businesses would consider applying for a P2P loan over the next year.

The study suggests the biggest obstacle to the growth of P2P lending is low awareness with six in ten (59%) consumers not understanding what the term meant. Furthermore, more than half (54%) highlighted a lack of knowledge as the principal reason as to why they wouldn’t invest in a P2P scheme, followed by the fear of borrowers not repaying the loan (46%).

Individual lenders can typically earn between 8% and 15% interest through P2P platforms such as rebuildingsociety, which is significantly higher than the sub-inflation5 returns offered by many bank and building society accounts. Basic rate taxpayers (20%) currently need to earn 3% on savings and higher rate taxpayers 3.99% to keep track with inflation.

Daniel Rajkumar, Managing Director at rebuildingsociety.com said: “This research shows P2P lending is well on its way to entering the financial mainstream with strong levels of interest from consumers and SMEs alike. The FCA’s regulatory oversight from next year will provide consumers with an additional layer of protection and our study shows this is very likely to boost take-up.”

rebuildingsociety.com has been operating since September 2012 alongside Funding Circle and thincats.com in the peer-to-business lending industry. It was founded after Daniel Rajkumar experienced frustration with his bank in terms of funding his other business interest, Web Translations Ltd, and took a P2P loan.

Daniel Rajkumar continued: “The evolution of this market will continue to generate value for borrowers and lenders beyond the financial transaction. It can be viewed as a marketing activity and businesses who borrow through P2P lending have effectively won a crowd of stakeholders with an interest in the success of those businesses. This is more powerful than institutional finance and both parties are slowly adjusting to this mindset.

“Clearly not all individuals and small businesses who are considering using a P2P lender will end up doing so but as long as borrowing and saving conditions remain depressed, demand will rise.”


1 Research conducted online between 10 – 17th May 2013 among a representative sample of over 2,042 UK adults and 356 UK SMEs

2 Nesta report – Banking on Each Other

3 BBA data – Banks’ support for SMEs – Q4 2012

4 Federation of Small Businesses

5 CPI inflation rate of 2.4%, as at 21 May 2013

RateSetter's provision fund tops £1million

June 5th, 2013

RateSetter, the UK's second largest peer-to-peer company specializing in personal loans, has announced this week that its provision fund - the pot of money that will repay lenders if their borrower defaults - has passed the £1million mark.

With RateSetter's £47million on loan and a current lifetime bad debt rate of only 0.36%, the provision fund would cover future bad debt 6 times over.  If bad debt were to rise to RateSetter's estimate of 1.4% the provision fund would still reimburse lenders with a significant amount of money to spare.  RateSetter have been very transparent with the data concerning their provision fund, and have the motto "Every Lender, Every Penny" as, to-date, no lender has suffered any loss to their capital.

Zopa, the UK's largest peer-to-peer company recently announced their SafeGuard product, which works in a very similar way to RateSetter's provision fund.  It is also expected that some new entrants will offer similar products.

Zopa loans at 4.9% APR

May 17th, 2013

Zopa, the leading peer-to-peer company in the UK, have loans of £8000 over 36 months at a record low of 4.9% APR for an A* borrower.  Loans of between £8000 and £10,000 have an APR of less than 5.0%.  This is a market leading rate and should attract a number of borrowers.