Is Peer to Peer lending the answer to all of our problems? Part 2

Last week we briefly described peer to peer lending and the potential benefits it can have on the UK economy in helping plug the gap left by the Banks. A recent study conducted by Nesta outlined that peer to peer lending has the potential to deliver over £12bn in business lending annually. In addition to this 75% of the lenders who were surveyed outlined that they would be increasing their lending over the next 12 months.

Despite this there are a number of people who fear this new phenomena and question whether or not peer to peer lending is safe. One question that always comes up is the fact that as a lender your savings are not guaranteed and that your savings can be lost. The Financial services compensation scheme, which will guarantee saver’s money which is deposited with a bank for up to £85,000. It also covers Investments for up to £50,000,however peer to peer lending is not covered by this.

Whilst it it true that not every business is going to be a success and not every individual will be able to repay their loan, if entrepreneurs and individuals do not have access to finance then our economy will not grow at the pace necessary to reduce the unemployment rate and deliver the jobs it so desperately needs.

The public sector has lost 640,000 employees since 2009 and a further 340,000 are set to be lost by the next general election. These lost jobs will need to be filled by the private sector and in order to create jobs, small and medium sized businesses need to be able to grow. Whilst the major banks do provide the vast majority of funding, they cannot possibly be expected to provide 100% of all the loans needed to help companies grow their businesses and create jobs.

Peer to peer companies have to ensure that the money that they lend out is given under the strictest conditions. If lender’s have bad experiences they will tell their colleagues and peers and in turn new lenders will be turned away and then their businesses will fail. Zopa, the first peer to peer lender in the UK for individuals has lent out over £280 million in loans, has a default rate of 0.78%. Ratesetter another peer to peer lender who have lent out over £67 million in loans have a default rate of 0.37%. Funding Circle who only lend to small business, has lent out over £97 million in loans, has a slightly higher default rate at 1.6%.

Peer to peer lending tend to reject about 85% of all applications received and the two of the largest lenders Zopa and Ratesetter and developed a fund which borrowers pay in to, to offset defaults and ensure lenders at a minimum would get their money back if an individual or business failed to repay their loan. In addition short term lenders can lend to multiple borrowers and therefore spread the risk of the money lent out. PiggyBank, another peer to peer lender spreads a borrowers money into £50 chunks and as a result reduces the risk of borrowers losing their money.

One thing that is for sure is that the status quo needs to change because the way things were died when the world was turned upside down by the global recession.

Next week we will delve a little deeper into some of the lenders in the market, what their criteria is and why some of the largest banks in the UK are starting to enter into the peer to peer lending market.