A Zopa-innovated credit phenomenon called peer to peer lending has entered the marketplace to link people who save directly with those who need to borrow money, such as through short term loans.
Savers and borrowers register on a peer to peer website dubbed a kind of ‘eBay for money’. Savers are making deposits in peer to peer accounts, in order to fund retirement or a home revamp. Although deposits are not protected as in traditional bank accounts or pension schemes, peer to peer web-based accounts are offering savers higher earnings.
The way it works is that the savings deposited are spread between borrowers. On a loan amount of say £4,500, a borrower may pay an 8.4% APR, while a saver may gain 7.4% pre-tax annual interest on a deposit of £5,000.
A representative example peer to peer loan includes:
- Pay approximately £154.26 per month over three years to borrow £5,000.
- Pay approximately £5,553.49 after three years.
- Charged 5.9% interest including a borrowing fee of £90.00.
- Credit over three years totals £5,090.00.
- Pay an APR of 7.2% totalling £463.49 interest.
Savers may deposit amounts from £10 upwards and borrowers may apply for loan amounts starting at £10. Alternative short term lending, through non-peer to peer banks and creditors, does not offer this type of minimal loan amount level with favourable interest rates.
Borrowers benefit from lower APR costs and savers benefit from higher gains than typical bank savings accounts. Even though savers are faced with the risk of having no guarantee that they will have their money returned, peer to peer loans are growing in popularity.
As an alternative to a potentially costly short term loan for bridging payment of expenses before receipt of wages or salary, peer to peer short term lending meets the needs of diverse borrowers. Peer to peer loans are not protected by the Financial Services Compensation Scheme, but Zopa is licensed by the Office of Fair Trading.
To minimise risk in peer to peer lending, peer to peer providers create £10 savings spreads between borrowers. Peer to peer loans have so far incurred minimal default and may, in the future, substantially challenge current high street banking practice. Bringing savers and borrowers directly together can reduce the cost of lending to borrowers, such as those wishing to access short term lending, and raises income potential for savers.
Setting up a peer to peer loan account
The basics of setting up peer to peer loans include:
- Registering for a peer to peer account.
- Getting a quick quote by entering a chosen loan amount, rate and term.
- Lending starts at £10.
- A current APR and quote is immediately provided.
- To proceed with application, personal details are entered.
- Borrowers are credit checked.
- Within 24 hours weekday, a loan decision is granted.
- A nominal fee is added to the loan if approved.
Peer to peer loan quotes and applications do not leave a trail on individual credit reports.