Is Peer to Peer Lending a Good Idea?
One of the fantastic things about the internet in recent years is the way in which it has opened up so many new possibilities for us.
Just a few years ago it would have seemed impossible for the average person to get involved in financing a start up company or earning money working for someone on the other side of the world, for example. Yet, these are just a couple of examples of what anyone can do now if they want to.
Another way in which the internet has changed the world forever is with peer to peer lending. If you haven’t heard much about it before now then you will probably be seeing a lot more before too long. Peer to peer lending on sites such as Zopa.com promise a new way of both borrowing money and investing money.
As they are the biggest peer to peer lender in the UK we’ll be using Zopa as example in this post. If you want to know even more about them then you can check out our Zopa Review.
How Does It Work?
It is such an incredibly simple idea that you’ll wonder why no one ever thought of it before. Let’s imagine for a second that we have a couple of guys who don’t know each other. Mr A wants to borrow £10,000 to buy a new car and Mr B wants to invest £5,000 in order to get a good return on it. Now, they could both go to their banks to carry out two individual transactions there. However, if they used a peer to peer lending site such as Zopa then there is every chance that it would work out financially better for both of them, as the bank doesn’t get a chance to earn money off both of them. In truth, one person doesn’t lend directly to another, as the money they put in is divided up into chunks and loaned to different people.
Of course, some people might think that borrowing or investing can only be done if there is a bank involved, as we are so used to dealing in this way. Yet, when you think about it you will see that people have been lending money to each other throughout history. Some type of banking system has existed since ancient times but it was also common for people to lend to one another as well. The fact that this can now be done online means that we have the option of cutting out the banks, just like a lot of our ancestors did.
Who Is Doing It?
You may not have heard yet of anyone who has borrowed or loaned money in this way but the numbers are growing all the time. If we take the example of Zopa.com, we can see that they are the biggest peer to peer lender in the UK, as well as being the first in the world to get going. They say that they have over 80,000 borrowers and 57,000 lenders on their books and the peer to peer industry is reported to have lent more than £600 million since it got going back in 2005.
As with any sort of loan or investment, it is important to understand if there are any risks involved. Of course, with the high profile banking problems in recent years it is clear that going to the bank isn’t exactly as risk free as we all once thought. In terms of peer to peer lending over the internet, it is reassuring to see that Zopa say that they look for borrowers who are sensible and creditworthy. The current list of requirements for borrowers is that you need to be over 20, have lived in the UK for at least 3 years, have a good credit history and earn a minimum of £12,000 a year. The person who lends the money can start off with as little as £10 and, as mentioned earlier, they will lend in chunks to different people rather than lending it all to one person. A good indication of the safety of the process comes in the fact the Zopa was voted as the most trusted loan provider several times in the recent MoneyWise Customer Service Awards.
The benefits to this kind of lending and borrowing are pretty obvious but still worth mentioning. The person who is lending the money gets a good rate of return and the peace of mind of using their money in a safe sort of investment. The person who wants to borrow money can choose from between £1,000 and £25,000 at very good rates. The repayment terms are 2, 3, 4 or 5 years with no early repayment fees.
As we can see, a lot of people have already given peer to peer lending a try. The most obvious type of person who is likely to try it is someone who is fed up with their bank, because of the charges, the interest rates or the service. However, I reckon that anyone who is internet savvy and wants to make their money work a bit harder will probably be interested in giving it a try too.
Have you tried Peer to Peer Lending?