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Is Peer-to-Peer lending the smarter alternative?


1st Jan 2015 Managing your Money

Is Peer-to-Peer lending the smarter alternative?

Peer-to-peer lending is on the up in the UK and across the world. But what exactly is it and how might it help you? We ask peer-to-peer lending experts.

Peer-to-peer success? Look no further than Airbnb

Launched in 2007, the San Francisco-based room-letting website enables anyone, anywhere in the world, to list spare space—from a single room to an entire mansion—on the website and rent it out like a hotel.

It operates in over 19,000 cities and in almost 200 countries and is now so popular that an Airbnb room is booked every two seconds.

Similarly, BMW announced in April that it is preparing to be the first carmaker to develop a peer-to-peer offering, to be called ReachNow, under which owners will soon be able to generate extra cash by renting out their cars to other consumers in a Seattle-based trial.


Investing together

These and other similar initiatives are testaments to the growing popularity of ‘collaborative consumption’—sharing, swapping and renting your possessions.

This even extends to financial services and investing. For example, ‘peer-to-peer lending is the now well-established practice of lending money to individuals or businesses through online services that match lenders directly with borrowers, enabling both parties to circumvent traditional providers such as the banks. 

These peer-to-peer lending companies operate almost entirely online, and so can provide services more cheaply than traditional financial institutions. As a result, those investing can often earn higher returns compared to those offered by the banks, whilst the borrowers can, in turn, borrow money at lower interest rates.

The appeal of doing so isn’t surprising given that over £160bn of UK savings are currently languishing at or lower than the 0.5% base rate and that businesses—particularly those in the SME sector—have been starved of financing opportunities since the early days of the recession as far back as late 2008.


New opportunities

Peer-to-peer lending doesn’t fit cleanly into any of the three traditional types of financial institution—deposit taking, investment or insurance—and is sometimes categorised as ‘alternative finance’.

There are many types of peer-to-peer lending in operation around the world. Many peer-to-peer loans are unsecured personal loans made to consumers, although some peer-to-peer platforms specialise in making secured loans to businesses and using physical assets, such as property, as security for those loans.

By the end of 2015, UK peer-to-peer lenders had collectively lent almost £4.5bn to consumers and businesses.

If you’re losing interest in your savings, why not do something more interesting with your money.