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Who gains, who loses on peer-to-peer lending?

18th Jan 2017
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Since 2005 the Peer to Peer (P2P) lending industry has grown rapidly. Was it there before? Certainly governments have used the concept – creating war bonds with no end date!

But in the commercial market there are other issues. What happens if the borrower goes bust? What happens if the P2P broker goes bust?

P2P lending is about matching investments from individuals with requirements for loans. Usually these are business related, but now expanding into other sectors such as property related loans (mortgages, buy-to-let and bridging). The idea works because the investor can receive an interest rate better than the bank offers while the borrower can achieve a rate lower than a bank loan. The broker takes a small percentage as their fee.

Is an investment safe?

There are two models when you place money with a P2P company. Either the investment is allocated directly with a borrower (often you select the companies) and your contract is then direct with that company, or it is with the P2P company itself and they pool the funds.

In the former case your risk is with the company which has borrowed. They go bust – you lose your money. However, many P2P companies have now established funds to cover such an event to repay the capital. In the latter case your contract is with the P2P company, so that if one investment fails it does not have such a dramatic effect on the investors.

A couple of points to note are that investments in P2P companies are not regulated and not covered by the Financial Services Protection scheme. Also, as from April 2017, investments may be made though ISA wrappers.

Is it sensible to borrow?

Any borrowing is a commitment. If all goes well there is no issue. However, the important consideration is what happens if it goes wrong. What leeway do I have in repayments? Will they help and support me? Banks have established corporate crises teams to help in this respect and more of the P2P companies are forming such units.

The future of the industry

It is a young industry and will continue to change as the more established players (banks) start to make their offerings. While many of the P2P brokers are not making profits at present it is expected that they will do in the future. Many have already floated as a way to create large reserves to cover the expense of marketing and growth and to secure their future for a number of years to come. 

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Chris Goodfellow
By Chris Goodfellow
30th Jan 2017 11:54

Interesting intro to the subject. We had a look at the growth of the industry and there's been a series of cases where lenders have gone into administration/ gone out of business. That said, the risk really sits with the lender and some have lost out. More here:

https://www.businesszone.co.uk/deep-dive/future/is-the-uk-ready-for-the-...

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