What is peer-to-peer lending?

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Nick Moules
21st December 2012

Peer-to-peer lending, or peer-to-business lending, is hogging the headlines in the finance section of the papers right now because of its common sense approach to lending and borrowing.

At the heart of p2p, or p2b as they are becoming known, is the notion that everyone gets a better deal. Against a national backdrop of low interest rates for savings and a banking culture that has flipped 180 degrees and now views risk in a completely different light to previous years, it’s hardly surprising that people are looking for alternatives.

Supply and demand

The market is created by connecting individuals or businesses looking to borrow money with individuals willing to lend money. It’s an age old supply and demand ‘dating’ service.

For many businesses, securing credit is one of the toughest parts of running a business in 2012 and everything points towards 2013 being similarly difficult. Being able to acquire finance through p2b lending is helping businesses grow in a challenging environment and they are happy to pay lenders a rate of interest that outperforms their savings accounts.

Lenders typically lend small amounts to many businesses at interest rates they feel represents their risk. This could be anywhere from 6-15% depending on the individual’s risk appetite.

A busy year for peer-to-peer lending

And it’s been a high profile end to the year too with a couple of notable developments for the industry.

Firstly the Government’s decision to regulate the industry from April 2014 is a nod towards its rising importance in the consumer and commercial finance landscape.

And the Government has backed itself, by investing £30m in British businesses through two platforms. It is a fast and uncomplicated way of funding reaching businesses that need it and stimulating the UK’s economy.

It’s a market on the rise, with over £350m lent to businesses and consumers so far. Default rates are low as many platforms stipulate criteria or run credit scores that rule out risky borrowers and increasing profile means platforms are even more aware of their responsibilities for listing suitable lending opportunities.

Hold on to your hats, 2013 could be the year everyone is talking about peer-to-peer lending!

 

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