A five minute guide on peer-to-peer lending and crowdfunding
THE nightmare for savers looks set to drag on and on, with inflation at 2.8 per cent and the Bank of England determined to freeze base rates for at least another three
The social lending concept is not as new as you might think. It was pioneered by Zopa in 2005. P2P lenders operate as an online marketplace, matching ordinary savers with individuals who want to borrow money, or small businesses raising funds to expand.
“The aim is to give both parties a better deal,” says Rhydian Lewis, chief executive at Ratesetter.
“P2P lenders can offer much more competitive savings and borrowing rates because there is no bank acting as the middleman.”
Zopa has arranged loans totalling £368 million while Ratesetter has loaned £103 million since 2010. Accountancy firm Ernst & Young predicts the industry will grow to five times its current size in the next three years.
How much could I get?
Zopa currently advertises a three-year variable rate to lenders of 4.1 per cent a year and a five-year variable rate of 4.8 per cent, after charges.
It charges 5.1 per cent to borrow £7,500 over three years.
Ratesetter quotes a savings rate of 4.4 per cent a year over three years, 5.7 per cent over five years and 7.2 per cent to borrow £5,000 over three years.
Funding Circle, which has loaned £146 million to more than 2,500 businesses, says it offers an average return of 5.8 per cent.
These rates are far better than you will get on the high street, says David Black, at Consumer Intelligence.
He says: “The best five-year, fixed-rate savings bond, from Secure Trust Bank, pays just 3.01 per cent a year, while ICICI Bank pays 2.55 per cent a year over three years.
P2P platforms are offering a real alternative to banks and building societies and are now very much in the mainstream.”
P2P lenders can offer much more competitive savings and borrowing rates because there is no bank acting as the middleman
Rhydian Lewis, chief executive at Ratesetter
Giles Andrews, chief executive at Zopa, says: “Our default rate is just 0.23 per cent. Savers choose us because we offer reliable, low-risk and predictable returns.”
P2P lenders aren’t covered by the Financial Services Compensation Scheme, which protects savers if their bank or building society goes bust, but Zopa and Ratesetter have both built up a pot of money to reimburse any losses, plus interest.
Is this the same as crowd funding?
There is a new take on P2P lending, called crowdfunding, which matches investors withstart-up companies and other projects.
Some schemes offer rewards, others give you equity stake in the business. You will make your money when one of the start-ups lists on the stock market, says Tom Britton, co-founder of crowdfunding platform SyndicateRoom.
“Our minimum investment is £500, although most people invest between £5,000 and £25,000.”
Returns can top 10 per cent or 20 per cent a year but Britton warns investing in start-ups is “inherently risky”.
He says: “You should only invest as part of a diversified portfolio.”
Other crowdfunding sites include CrowdCube, Crowdfunder, Kuber Ventures and Seedrs.
Most savers will want to stick to Zopa and Ratesetter, for a small chunk of their pot.