What is P2P?
Peer-to-peer lending comprises an online platform that connects an investor directly with a borrower, in return for a fee. Part of the alternative finance space, P2P platforms are competing with other lenders such as challenger banks and conventional banks.
P2P arose as an alternative to high-street banks, which due to their prescriptive lending criteria leave many consumers and businesses unable to obtain finance. The industry argues that rather than just taking the business the banks don’t want, it can provide more specialist finance solutions more quickly and sometimes more cheaply. P2P platforms are small and nimble, cutting down compliance costs and making the process faster.
Who is the typical borrower and lender?
Borrowers can be consumers, small businesses, property developers, or professional landlords, with various P2P platforms willing to service these different groups.
Investors can be retail investors, sophisticated or high-net-worth investors, or institutions.
What’s the attraction for retail investors?
In a period of historically low interest rates, investors can get returns in double-digits on some platforms, depending on the risk profile of the loans. Older and retired people who want to boost their pension pots will sometimes opt for P2P – although it’s important to remember this is an investment product, not a savings product. P2P investments are not covered by the Financial Services Compensation Scheme, which protects savings in a bank up to £85,000.
What’s the attraction for borrowers?
A speedier process, better customer service and – as previously mentioned – an increased chance of obtaining finance.
What sort of numbers are we talking about here?
Every platform runs a different model, so the sorts of loans are varied. Depending on the platform, investments can range from anything from £10 to £50,000+ while loans can range from £1,000 to the low millions. Returns are typically around 4-8 per cent but can be higher.