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Peer-to-peer lending concept
Folk2Folk is one of the latest companies to join the peer-to-peer arena, and is based in the South West of England. They have published a useful document on peer-to-peer lending, which is worth republishing here, and gives us a mention too.
Peer-to-Peer Lending – a concept you are likely to hear much more of over the coming years
There are many good reasons why you would need to borrow money, such as to invest in a business, secure short-term funding or to refinance a loan at a better rate of interest, to name but a few. Two of the most popular avenues to borrow money are from a bank or from friends and family.
However, a third group is fast catching up – Peer-to-Peer lenders. Peer-to-Peer lenders are everyday people who have money and wish to lend it, in return for a competitive rate of interest (usually between 6-12% pa).
There have been many peer-to-peer lending platforms set up over recent years and their popularity with both lenders and borrowers is increasing at quite an astonishing rate.
The Peer-to-Peer lending platforms make the process of introducing lenders and borrowers very simple and the platforms are often exclusively web based. They take much of the administration away that borrowers experience with their high street bank.
The various platforms do differ and it can be confusing to know which platform a borrower or lender/investor should use. There are platforms that lend to individuals for their personal needs and those that lend only to businesses. Some platforms require no security; others require personal guarantees or require borrowers to put forward property as security. There are a few comparison websites such as www.p2pmoney.co.uk, helping demystify the various platforms.
There are of course risks involved for those using Peer-to-Peer lending platforms as the industry at the moment is not regulated, although this is due to change in April 2014. Many of the platforms are building in safeguards for lenders. The various platforms claim to carefully vet borrowers by carrying out credit searches etc.
Lenders should be wary that the interest rates quoted often do not factor in the average default rate and the various platforms have different levels of default. The headline interest rate is therefore not the only thing to consider. Investors/ lenders should also consider the form of security being put forward by borrowers. The form of security will likely alter the rate of recovery.
One peer-to-peer platform has focused on property finance in the South West and is applying a “local touch” by drawing upon local knowledge of the property market and borrowers generally. Folk2Folk was launched in February this year and has already introduced £4 million of secured loans (£11 million if you include loans in place at launch). Folk2Folk introduce loans largely to the business community starting from £25,000 and up to £1million, at interest rates typically of 7-9%. Loans are secured by a first mortgage on property, other than the borrower’s home.
Loans introduced to date have gone towards projects such as house building, commercial leisure facilities and property acquisitions, together with various renewable projects. The largest loan to date is £1 million.
One of the key attractions of Folk2Folk is the speed in which it can process and deliver loans, completing the process within 7-10 days from application.
Folk2Folk has uncovered a significant lender appetite and has recently embarked on a marketing strategy to locate a higher number of borrowers to satisfy lender requirements.
It is certainly a fascinating time for peer-to-peer lending platforms, which are quickly finding themselves able to fill some of the Funding Gap.
It really is a return to basic principles of lending and borrowing and its simplicity is part of the reason for its success.