Get to grips with social lending
Have you searched for a personal loan lately?
If so, you might have noticed a few less-familiar names popping up at the top of the price comparison tables. Names such as Zopa and RateSetter, which, until recently, only the most plugged in borrowers knew about, are quickly becoming a mainstream, credible alternative to the banks.
Zopa, RateSetter and Funding Circle are the biggest of the lenders known as peer-to-peer, or 'social' lenders, which means the money that ends up in borrowers' pockets comes directly from the wallets of ordinary individuals who want to make a bit of a return on their cash by helping someone out. It is a bit like borrowing from a friend or neighbour, but without the awkwardness or risk that it could turn sour.
The websites are not new to the lending market - they have already lent £218 million, £29 million and £41 million respectively, but they are growing rapidly as borrowers look for alternative bank loans and savers look for better homes for their cash. Funding from Zopa savers was 56% higher in June 2012, compared with June 2011, and new borrower numbers are up by more than 30% over the period.
Alex Gowar, marketing director at RateSetter, says: "We have seen a change in consumer behaviour: rather than picking up the phone to their bank manager, borrowers are more inclined to shop around online and see if they can get a better deal, or indeed avoid a bank altogether."
He adds: "Savers are slowly waking up to the fact that high street banks may offer 'safety', but now pay out little, none, or even negative real returns."
Charlie Burgess, spokesperson for Zopa, says: "Zopa is growing rapidly as more savers and borrowers discover its market-leading rates and fair terms. It was voted Most Trusted Loan Provider for the third year running, beating banks and building societies, in a survey of consumers by Moneywise."
James Meekings, co-founder of Funding Circle, the only one of the three to focus on business lending, says: "We used to have to go out and find businesses to borrow from us. Now, more and better businesses are coming to us.
"The sector is getting bigger; the size of the loans being issued on the site is getting bigger, from a maximum of £50,000 when we launched in August 2010 to £250,000 now. The average loan size has gone up from £30,000 to £60,000. The companies are also getting bigger, with an average turnover of £1 million, although it ranges from £100,000 to £80 million. It is quicker and easier than traditional borrowing – 50% of the business we do is outside of banking hours."
An alternative to banks
Growth in peer-to-peer lending has been in direct proportion to increasing disillusionment with banks. RateSetter witnessed a surge in the number of new investors wishing to use the service as an alternative home for their savings as the Libor-fixing bank scandal unfolded. There was a 150% increase in the amount of new saver money deposited in the first 10 days of July 2012, immediately after the Libor story broke, compared with the previous month.
For borrowers, the sites offer a quicker, easier and often cheaper way to access cash than asking for a personal loan from the bank. Zopa has the cheapest loans between £1,000 and £7,000 in the country. But the peer-to-peer lenders do not offer a better chance of being accepted for a loan for credit-impaired borrowers; credit-checking is as stringent as banks' and the majority of applicants are turned down.
The sites are slightly different. Although Funding Circle is for businesses, it is not for start-ups (the average age of its borrowers' businesses is 10 years). Entrepreneurs would be better off applying through Zopa, where lenders will consider stumping-up a few thousand pounds to those with a good business plan.
There are a number of other peer-to-peer sites, such as crowdcube.com, which can be used by new businesses. RateSetter and Zopa offer loans for just about any purpose, although car purchases and home improvements are high on the list. Getting a quote from either site will not affect your credit score, although the actual application will.
Zopa offers loans from £1,000 to £15,000 and there is an £80 standard borrowing fee added to the loan. Including the borrowing fee, a typical APR on a £5,000 loan over three years would be 7.4%, based on current rates, giving monthly repayments of £154.79.
Unlike Zopa, Ratesetter does not set an overall borrowing limit but tailors this to the individual, depending on their credit score. The borrowing fee is between £50 and £130 depending on the term of the loan.
No fees for early repayment
Unlike banks, these sites do not charge fees for early repayment – the earlier borrowers repay, the less interest, which is a big incentive to clear the debt early.
Age is an issue. RateSetter has a minimum age of 24, while Zopa offers 'Young Zopa' rates, for 20 to 25-year-olds, which have a higher typical APR of 9.16%.
RateSetter sets itself apart in the way it attracts investors, typically "middle-England savers". It offers quite traditional looking savings products, such as a 3.3% monthly access account. It pools the fees paid by borrowers into a provision fund, which is used to mop up any bad debt (the default rate is 2%) so no savers lose out.
With Zopa, lenders can offer chunks of cash as small as £10 to borrowers. An individual's money is spread across different borrowers to minimise the risk. Average Zopa lender returns after fees and actual average annualised defaults are 5.5% over the past year – better than the best savings account or fixed-term bond.
One of the big differences between peer-to-peer and normal saving and lending is the industry is unregulated, which is a concern for savers as it means their deposits are not covered by the Financial Services Compensation Scheme.
However, borrowers are covered by the Office of Fair Trading and anyone can complain to the Financial Ombudsman Service if they are unhappy with the way the lender has handled their initial complaint. But the lenders themselves argue they are actually safer than traditional banks because of the way they distribute funds and credit-score borrowers.
And there are plans afoot for more formal regulation to be introduced as the sector grows. So while the names might not yet trip off the tongue as easily as Lloyds TSB or Barclays, it can only be a matter of time before they do.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.