Peer-to-peer borrowing is a type of lending system that has greatly grown in popularity over the last few years. This is largely because businesses have been unable to secure loans from banks, the typical route they would go to fund expansion. Peer-to-peer lending is something that is seen to be a win-win situation, lenders get a better return on their savings and borrowers are able to get a loan at a lower cost.
There are companies which facilitate peer-to-peer lending and those lending the money are allowed to decide the interest rate that they want to charge. Peer-to-peer lending is also capable of closing the gap that exists between what borrowers can lend and what savers can earn. This dramatically reduces the margin which the banks normally take and makes borrowing and lending more profitable for both parties.
One current player in the market is Zopa, a company that was founded in 2005 and matches lenders with borrowers. The service is based online and borrowers are given a creditworthiness check and then given access to a pool of lenders. All loans are taken in £10 packets from different lenders, this means that a loan valued at £1000 would come from 100 different investors. This reduces the risk on a lender of them losing a large amount of capital if a borrower defaults.
The loans offered by the company are growing in popularity as they offer a very competitive rate when compared to the banks. Loans on the website can be taken for just over six percent, which is very favourable to banks rates of around 12.7 percent.
The average return for a lender on Zopa stands at about 6.2 percent, but this is before any consideration is made for potential bad debts. This is a significantly larger sum than a lender will get if they have just left the money in the bank. The company highlight that six percent is just the average figure and many lenders are getting much higher returns if they are willing to wait a bit longer for them. Lenders are charged one percent per year on money lent as a service charge.