If you have a savings account you will know that bank interest rates are utterly dismal at the moment. You’re probably not getting more than 3% interest. Meanwhile if you’re looking to borrow money, you could be looking at paying anything between 6% and 26%. So if you would like to close up the difference in these rates, and make a lot more on your savings, read on to find out about social lending…
- What is social lending?
- How does it work?
- Is it safe?
- Which are the websites and how do they differ?
Social lending (also called Peer-to-Peer, or P2P Lending) is really very simple.
Essentially it’s about lenders and borrowers, like you and me, getting together – with the help of one of the websites listed below – to lend to , and borrow from, each other.
The theory is that
- borrowers will pay less for their loan than with a bank
- lenders get more than they do sticking their money in a savings account.
We think social lending is a great idea, but if you’re not convinced, read on to find out what the benefits could be for you…and here’s a video to explain too…
Essentially, ‘lenders’ (or ‘savers’) can choose the level of risk they want to take with their money, which will then determine the interest rate they can get (i.e. the higher the risk, the more the reward and vice versa). Their money goes into the relevant lending pool depending on what kind of person they want to lend to and at what rate, and it’s then lent out in multiples of, between £10 to £30. This means you never lend more than £10-30 to one person which spreads the risk a lot.
In the case of all the social lending companies listed below, the checks done by the websites tend to be rigorous. RateSetter for example, claims that it rejects 85% of the applicants for loans because their criteria is so strict.
The social lending sites listed below generally use external credit check companies to determine the potential borrower’s credit history, identity and financial status and the size of the loan available to the borrower depends how good their credit rating is.
How does it work? Potential borrowers are categorised into one of the categories A*, A, B, C or ‘Young’, depending on their perceived risk level. Lenders can then go on to the site and offer a certain amount of money to a certain category for a certain amount of time. Borrowers snap up the loans with the best rate for them. Zopa lenders only lend small chunks to individual borrowers to minimise risk.
How much can you lend/save? £10 – £25,000.
What are the fees/costs involved? Borrowers are charged a £100 transaction fee. Lenders 1% of what they lend.
What checks do they do on potential borrowers? Checks are carried out by Zopa’s underwriters and include identity, credit history and income. The company also carries out predictions for potential bad debt. Zopa claims its credit checks are ‘better than banks’.
What happens in the event the borrower defaults? Missed repayments are dealt with by a collector agency. However, if, after all efforts,
Other information: The average rate of return for lenders between July 2010 and August 2011 was 6.8%.
Why we like it: Launched in 2005, it is one of the longest-standing social lending sites and has won a whole host of rewards including Moneywise Most Trusted Personal Loan Provider for the last two years running.
The pros and the cons: the pros for savers is primarily that you can get really good interest on your money. The cons are that it is much riskier than other types of saving (any of your borrowers could default, although if they did you wouldn’t lose too much for each default), you have to tie-up your money for at least 6 months and you can’t keep the money in a Cash ISA so you have to pay full tax on the interest.
How does it operate? Ratesetter is slightly different in that lenders only loan to one person. This means that the loans arranged directly between lender and borrower are tailor-made to suit both parties, and are likely to reflect the fairest rates available. Lenders have the option to lend on a rolling monthly basis, which means the rate can vary each month, or for a fixed three-year period.
How much can you lend/save? From £10 (no maximum)
What are the fees/costs involved? For a rolling loan, borrowers pay £5 a month, and a three-year fixed loan will cost £115 upfront. Lenders pay 10% of the interest received back to RateSetter.
What checks do they do? The company takes borrower applications, vets them, and takes a Credit Rate from successful applicants which contributes to the Provision Fund. The minimum age for borrowing is 24-years-old.
What happens in the event the borrower defaults? RateSetter will automatically send a claim to its Provision Fund to reimburse lenders.
How does it operate? This company works in the same way as the others, but instead of individuals borrowing, it is small businesses. Businesses can apply for a loan via the Funding Circle website and, once accepted, they are put into one of the risk categories. Registered savers and investors can then compete to take on the loan. Once it has been funded, the business in question can choose to accept the rate, or hold on for a better offer. Individuals lend in multiples of £20.
How much can you lend/save? From £20 (no maximum)
What are the costs? The lender fee is 1% of the loan, collected from the repayments monthly and only if the borrower makes a payment to you each month. There is also a small fee if you choose to sell your loan. If a borrower accepts a loan, Funding Circle will charge a completion fee of 3% of the amount borrowed for the first loan. For any subsequent loans, this fee is reduced to 2%.
What happens if the borrower defaults? Funding Circle arranges for a collection agency to chase missed payments.
Checks: According to Funding Circle, Funding Circle underwriters screen every business loan application using the same information that banks use and only allow vetted, established and creditworthy businesses into the community.
Other: Lenders can decide to sell part or all of their loan to other savers or investors before completion. The average gross yield is 8.4%.