Peer-To-Peer Lending: Analysing the Facts
Peer to Peer (P2P) lending is an idea that has been around for many years and the process is fairly simple. There are two parties — the lender and the borrower. The lender has the capital (or funds) accessible for a loan. The borrower has the requirement for the capital and would like to borrow funds via a legal loan agreement. This may seem like the lending model operated by banks and Financial Institutions, yet there are distinctions within the type of the money lending arrangements.
How is peer-to-peer lending different?
In the peer-to-peer network, many money lenders pool assets or funds to make capital accessible to the borrowers. This makes the system scalable an this pooling of assets has innumerable advantages that allow lenders to alleviate their risk by diversifying their lending portfolio.
Loans can vary a lot in measure. Peer-to-peer loans can begin from as little as ten thousand pounds (£10,000), working up to over one million.
Peer-to-peer lending has been around for over 10 years now (in this current incarnation). It has helped numerous small and medium sized businesses gain access to funds that conventional banks and financial institutions had reduced and/or restricted in recent years. Peer-to-peer lending is letting lenders make solid profits on the money that has been loaned out.
Different p2p platforms offer diverse returns; however, numerous peer-to-peer platforms are offering yields as high as *10% per annum. Some lenders have been fortunate enough to see some of these profits, however, the market is becoming saturated and this is affecting borrowers and lenders a like. The profits offered are still higher than the rates that banks offer via their typical deposit or savings accounts because of the currently low UK interest rates.
* illustrative example only
How is the present circumstance?
The amount of cash being lent out by means of peer-to-peer lending has been growing every year for the past few years. The market has now started to show signs of struggle with regards to potential bad debt.
This could cause some borrowers defaulting on their loans. There is a general perceptions and absence of transparency in the market overall and this implies that money lenders are not always sure where the resources that they are investing are being used. Another issue affecting the market right now as well is that as the market is getting saturated, the profits offered by the peer-to-peer platforms have begun to diminish too. Returns have dropped from double-digit yields from the higher-risk loans to low single-digit yields.
Is there any alternative offered to money lenders?
Peer-to-peer lending has turned out to be progressively regulated which implies that P2P platforms have needed to expand and re-model their business providing better ‘insurance’ for lenders and maintain funds in somerset of reserve to cover potential bad debts.
Money lenders now also have the alternative to curtail tax bills as well by using an ISA based P2P loans (known as IFISA) that a number of peer-to-peer platforms are starting to offer. While these measures do go some way to enhance the insurance to money lenders, P2P lending still has to be seen as a risky venture choice and where in the case where some borrowers may default, must fully understand and know their risk from entering into any legal arrangement.
Please ensure as a lender, you ask questions, do enough research and don’t be enticed just by the potential higher rate of return.
We at Stratosphere peer to peer lending ensures our deals will provide the protection, the security and transparency a lender needs – please review our FAQ section for more information.