Peer-to-peer lending is a rapidly growing, FCA-regulated form of investing in which people with money who are looking to achieve an interest return are able to lend collectively to credit-checked individuals and business who are looking to borrow.
Peer to peer loans are typically organised and transacted via online peer to peer ‘platforms’, such as RateSetter, Funding Circle and Zopa. The purpose of these peer to peer websites is to source and credit-check the potential borrower, to facilitate the loan and to automate, where possible, much the various legal and regulatory processes involved in creating a lending relationship.
Over the past 10 years the peer to peer lending platforms have become an increasingly strong force, serving a borrower need which had historically been served only by traditional banks and building societies. The key difference however is that online peer to peer platforms have a much lower overhead than a traditional banking model would require. The result is that the borrower is able to access credit at a lower rate, yet, in contrast to the banking model, a greater portion of this interest can be passed on to the lender. The resultant effect is that – in basic terms – the borrower can pay less interest than he or she would otherwise pay using a bank, and the lender receives a greater amount of interest than he or she would otherwise be entitled to from a bank. In effect the interest rate ‘spread’ taken by the bank has been eroded.
Over £5+ billion has been lent in the UK by the peer to peer lending sector so far – and the numbers show no signs of slowing down any time soon.