Peer to Peer lending (P2P) is a concept that has been around for a number of years now. The idea is pretty straight forward. There are two parties, the lender, and the borrower. The lender has capital available to lend. The borrower has a need for the capital and would like to borrow this money. This may seem similar to the lending model operated by banks and Financial Institutions, but the difference is in the selection of the lenders.
How is P2P Different?
In the P2P network, a number of lenders pool resources to make capital available to the borrowers.
This makes the network scalable. This pooling of resources has a number of advantages and it can allow lenders to mitigate their risk to default by diversifying their lending portfolio. Loans can vary a lot in size. P2P loans can start out from as small as ten thousand pounds, working up to over one million.
What impact is that is having? P2P lending has been around for over 10 years at this stage. It has helped many small and medium business gain access to funds that traditional financial institutions had curtailed in recent years. P2P lending is allowing lenders to make strong returns on the money that has been lent out. Different platforms offer different returns, however, many P2P platforms are offering returns as high as ten percent per year.
Some lenders have been lucky enough to see some of these returns, however, the market is becoming saturated and this is impacting borrowers and lenders alike. The returns offered are still higher than the rates that the banks are offered on deposit rates due to the current low-interest rates.
What is the current situation like?
The amount of money being lent out via P2P lending has been increasing year on year for the past few years. The market has started to struggle with bad debt. This is causing a number of borrowers defaulting on their loans. There is a lack of transparency in the market overall and this means that lenders are not always sure where the funds that they are investing are being used.
Another issue impacting the market at the moment as well is that as the market is becoming saturated, the returns offered by the P2P platforms have started to decrease as well. Returns have dropped from double-digit returns from the high-risk loans to low single-digit returns.
Is there any recourse offered to lenders?
P2P lending has become increasingly regulated which means that P2P lending platforms have had to increase the protection for lenders and maintain funds in reserve to cover bad debts. Lenders also have the option to minimise tax bills as well by using an ISA that many P2P platforms offer. Whilst these measures do go some way to improve the protection to lenders, P2P lending still has to be seen as a risky investment option and in the case where many borrowers default at the same time.
