Growing returns: Keen gardener Lynne Oak earns £1,000 a month in interest from peer-to-peer lending firms DEALS FOR SAVERSI'M WILLING TO TAKE THE RISKOne saver who decided to try peer-to-lending is Lynne Oak, 59, of St Albans, Hertfordshire. Lynne, who used Zopa, says: ‘I saw an advertisement online saying, “How to beat your own bank” and thought that’s a great idea. I’d just been given my Christmas bonus at work so I thought I would give it a go.’
That was in 2006. Now she is a committed lender.
The former City worker, who runs her own foot care business, gets about 6.5 per cent annual interest after defaults and fees – a monthly income of £1,000.
Lynne is not hugely worried that the peer-to-peer lending industry is not regulated. ‘Put it this way, I purchased two regulated investments and I’ve lost money on both of them. But I haven’t lost anything from my peer-to-peer lending,’ she says.
Savings rates offered by banks and building societies are at an all-time low.
The best instant-access account, from Nationwide Building Society, pays just two per cent. In stark contrast, peer-to-peer lenders offer rates nearly three times higher.
The country’s biggest peer-to-peer lenders, also known as lend-to-save, are Zopa, RateSetter and Funding Circle, which between them have 95 per cent of the market.
Giles Andrews, chief executive of Zopa, says: ‘Our typical lender is a middle-England saver who is terrified about the impact of inflation on their standard of living.
The Government’s Funding for Lending Scheme (which provides banks with cheap money) has led to even lower savings rates, which makes my proposition even more appealing.’
You can lend any sum from £10, with interest rates typically around five per cent after fees and the cost of bad debts.
But with the higher rate comes a bigger risk. Peer-to-peer lenders will not be regulated until April next year.
This means they are not covered by the Financial Services Compensation Scheme, which protects savers for up to £85,000.
So if something did go wrong, you could lose some or all of your money. Alex Gowar, director of RateSetter, warns: ‘Peer-to-peer lending isn’t risk free. There are no guarantees.’
So far peer-to-peer lenders have kept bad debts impressively low. Zopa’s loan default rate is 0.78 per cent while RateSetter’s is even better at 0.37 per cent. Andrews says: ‘We live and die on our default rate so it’s essential to keep loan defaults to a minimum.’
Peer-to-peer lenders pay income tax on any interest earned, but while fees are tax deductible, defaults are not. This means that if the rate you earn before fees and defaults is ten per cent and defaults amount to four per cent, you pay tax on ten per cent despite only earning six per cent interest. Income can be withdrawn or reinvested.
More... Why people are flocking to lend-to-save and how it works 'The banks said no to my loan, but cutting out the middle-man means my chocolate factory can grow' How the lend-to-save firms work
Lenders work in slightly different ways. Zopa groups its borrowers into three ‘risk markets’ – from A* (the safest) to B (the most risky). A* savers earn 5.2 per cent after fees are deducted, however those in the B category could get a return of 7.1 per cent after fees. Zopa divides lenders’ money into £10 chunks, so if you lend £2,000 it will be spread across 200 borrowers.
Zopa has just launched another option called Safeguard. Savers can earn a maximum 5.1 per cent but Zopa promises to make up all the money owed by a borrower, including the interest, if they default. Tax is charged only on the 5.1 per cent. This is the only option for new lenders, while existing lenders can use all options.
Funding Circle, the biggest peer-to-peer lender to small businesses, works in a similar way to Zopa, with borrowers grouped into different risk categories.
It also recommends that lenders spread their money with several businesses although it is not mandatory. Average returns are 6.2 per cent after fees and default rates.
Samir Desai, chief executive of Funding Circle, says: ‘There are two ways to lend – you can either pick and choose the companies you’d like to help or you can go for our auto option where we select the companies you lend to. People tend to go 50-50.’
RateSetter, the third-biggest peer-to-peer lender, works in a different way. Instead of dividing borrowers into different risk categories, it has a pot of money in place to protect savers should one of their borrowers default. This is funded through a fee that borrowers pay when they apply for their loan.
Alex Gowar of RateSetter, says: ‘We wanted to make peer-to-peer lending simple and safe. The provision fund is like a safety cushion.’
The ‘safety net’ means a slightly lower interest rates for lenders of between 2.4 and 5.2 per cent.
DEALS FOR BORROWERSYou can typically borrow from £1,000 up to £25,000, but how much interest you pay depends on your credit rating, the amount you borrowed and the period of repayment. Zopa charges 6.4 per cent for a £5,000 loan over three years.
Fees for borrowing are usually included in the APR. But peer-to-peer borrowing is not for anyone struggling to find finance, as many of the lenders have stringent criteria for taking out a loan. Zopa refuses 80 per cent of applicants while RateSetter rejects 85 per cent.
On the move: Sue and Ed Baker used a RateSetter loan to buy a carSue Baker, 50, and husband Ed, 47, from Solihull in the West Midlands, applied for a RateSetter loan when they decided to buy a new car. Sue, a full-time personal assistant and stepmother to Chris, 25, Alec, 22, and Rory, 19, says: ‘I didn’t know anything about peer-to-peer lending before I used a comparison site which had RateSetter listed on it. It turned out that the loan rate was below what the high street banks were offering.’
She had no qualms about giving it a go and found it easy to use. She says: ‘It was all sorted within a matter of minutes.’
Sue paid about six per cent interest for her two-year loan of £6,500 including fees, but decided to use the company’s free early repayment service and cleared the loan just before Christmas.
She says: ‘I was really happy with the service. I will definitely use it again. I might even use it to lend next time.’
Suits me! Tailor measures up a customer and gets a tip on a big loan in return Perfect fit: Funding Circle helped fund Charlie Allen's expansionDespite the launch of the Funding for Lending Scheme last year, which aims to make it easier for banks to lend, small businesses are still finding it difficult to obtain finance.
Peer-to-peer lending provides an alternative solution as tailor Charlie Allen, 52, from Highbury, North London, found out when he wanted to expand his business in nearby Islington.
‘I needed bigger premises so that all my tailors could be in the same place,’ he says.
‘I also needed some new machinery and another member of staff. I didn’t even bother trying the banks as I knew they wouldn’t even have entertained the idea. Instead, one of my customers who I made a suit for told me about Funding Circle.’
Charlie, who has made suits for major retailers such as Asda and designed the England 2010 World Cup football kit, borrowed about £50,000 in December at 9.2 per cent over three years.
The father of three says: ‘The application process was quick and easy. The loan is now set up and working – I’m very happy with the experience.’
To help smaller businesses, Zopa and Funding Circle are both aiming to offer loans to sole traders.
New lenders are banding together to raise standardsWhile most peer-to-peer customers are positive, the industry is not without its problems.
The closure of lender Quakle in 2011 hit confidence. There have also been concerns about another lender previously called Yes-Secure but now under the name Encash. So far this year the company has granted only two loans, totalling £3,810.
But spokeswoman Supriya Rocha says the slow uptake is because the lender has been focusing on making the website more user-friendly.
She says: ‘If we were in trouble we wouldn’t be relaunching our website.’
Peer-to-peer lenders recognise that one company could tarnish the whole industry and this is why the three big guns – Zopa, RateSetter and Funding Circle – have launched a self-regulatory body called the Peer-to-Peer Finance Association. It aims to ensure members stick to basic rules on how they conduct business.
From next April the industry will be regulated by the Financial Conduct Authority. Zopa chief executive Giles Andrews says: ‘When that time comes, businesses will either have to comply with regulations laid down by the regulator or be shut.’
Those with complaints against peer-to-peer lenders are currently unable to use the services of the Financial Ombudsman Service to get redress.
FOS spokesman Martyn James says: ‘These lenders are on the regulator’s radar so we’re keeping a close eye on them.
‘It’s always good to see new avenues available for people to borrow money, but at present if you have a problem there is no protection and we wouldn’t be able to help officially as they’re not regulated.’
