Savers who want to escape the high interest rates that banks charge for credit, increasingly turn to peer-to-peer lending. This form of crowdfunding is one of the fastest growing markets in the UK.
However, whereas interest rates of 5% to 6% sound very appealing, peer-to-peer lending is not all roses. It’s a high-risk form of lending where risk can be seriously mispriced. Even though there is no guarantee that these loans will be repaid, data from the peer-to-peer finance association shows that by the end of June £1.6bn in loans were provided, illustrating an inflated confidence in the sector.
The track record, however, is very good. Both Zopa and Ratesetter, two of the biggest providers of loans, claim to have repaid all funds that investors put in. The former one even managed to do so during the recent credit crunch in 2008.
Peer to peer lending is an alternative to investing but it must be noted that the industry in its current size and form has not been tested during recessions.
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