Peer to peer lenders boom

Posted by Josh Conibear in Banking on 12 December 2013 - Josh worked as a Credit Analyst at checkmyfile until 2014

Peer-to-peer or social lending businesses have capitalised both on new technology and low savings interest rates to offer savers potentially better returns than they would get from conventional savings products.

In a nutshell, peer-to-peer lending companies are websites which cut out the banks and allow you to lend directly to other individuals or businesses.

You choose how much you want to lend, who you want to lend to and how much interest they should pay. Peer-to-peer websites cut out the banks and link savers and borrowers directly. This is how the loan can be “matched” at better rates for both parties.

Social lending websites, which include Zopa, RateSetter and Funding Circle have become hugely popular since Base Rate fell to 0.5%, because they offer above inflation returns of around 6%.

But savers who have turned to these middlemen for a rate-boost have found that, like interest on savings accounts, all returns from social lending are taxable.

More than £500m has been successfully "matched" since peer-to-peer arrived in the UK with the launch of Zopa in 2005.

Many were disappointed that the recent autumn statement failed to bring about the inclusion of peer-to-peer lending within Isas, which would represent another boon for the industry, though how such transactions would be recorded in Isa portfolios is clearly a challenge.

The peer to peer industry is relatively new and established firms such as Zopa already meet the minimum standards to be applied by the Financial Conduct Authority in April 2014. Some smaller start-up social lenders may struggle to become compliant, and, as has happened in the payday loans industry, may leave the market rather than face the costs of regulation.

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