In the years since the financial crisis, banks have restricted access to credit and cut rates for savers. Peer-to-peer sites are designed to bypass the banks and solve both of these problems at the same time.
What is Peer to Peer Lending/Investing?
Peer-to-peer sites act as an introducer – between borrowers looking for credit on the one hand, and savers or investors looking for better returns on the other. Once you take away the bank in the middle, both groups get better rates.
Obviously, peer-to-peer sites need to keep a tight control on where savers’ money goes. They do this by running stringent credit checks on borrowers. When a borrower is accepted, their case will be profiled by risk. This can give investors the ability to opt for high risk/ high return options or vice versa.
The sites do the administration and repayment legwork, taking a fee for their service.
The main risk with peer-to-peer lending is that funds are not protected by the Financial Services Compensation Scheme. This scheme insures normal savings accounts for up to £85,000 per person per institution if a bank collapses, but peer-to-peer funds do not come under this mantle.
However, different peer-to-peer websites do have different mechanisms in place to alleviate risk. Some spread investors’ money across many different borrowers to lessen the impact of any defaults upon any one investor.
Some allow you to choose custom investments, to select an above-average or below-average risk profile. And some offer a fixed rate, so you know roughly what to expect, barring a catastrophe.
The sector is also regulated by the Financial Conduct Authority. This means that sites must follow a set of safety standards and have contingency plans in place in case anything goes wrong.
The regulator also makes sure that firms do not hoodwink less experienced investors by downplaying the risks – as it’s imperative that savers know the score before they put forward their cash.
The Bottom Line
So, if you’re getting no joy from banks, as a saver or a borrower it may be worth considering whether you’re prepared to take a leap of faith into a relatively new industry to see if you can get what you’re looking for.