Peer-to-peer (P2P) lending in the UK began sixteen years ago with the launch of Zopa. It started as a relatively novel concept and was regarded as a niche part of the consumer credit market.
In the years since, it has grown significantly and now represents a major part of the alternative finance industry.
However, as the sector has become more established the myths surrounding it have become more prevalent. To dispel some of the common misconceptions, we’ve focused on six of the most prominent to provide some clarity between what is fact and fiction.
1. P2P lending is not regulated
The P2P sector in the UK is regulated by the FCA and has been since 2014. The process for a company to secure full FCA authorisation can be a lengthy one and it took us nine months to get it. However, not every P2P lender in the UK is fully authorised so consumers do need to be aware of that. Nonetheless, it’s misleading to say that P2P lending is not yet regulated and is therefore risky. The sector is regulated and offers access to very viable products for investors to include as part of their portfolio.
2. A sharp rise in interest rates would threaten P2P lenders
Interest rates have remained low by historic standards over the past decade as the sector has continued to grow. People have used this fact to argue that the model wouldn’t work if rates rose sharply, because borrowers would be deterred by the higher cost of credit. Although there may be a change in the rate given to borrowers these would not necessarily be dictated entirely by the Bank of England base rate. P2P lenders are more likely to set rates based on the demand and supply between investors and borrowers, which means customers would be able to shop around to find the best deal for them.
3. P2P lending is for tech-savvy millennials
P2P lending is still in its relative infancy compared to other financial sectors, and is largely online-based, but it is a product that is used by a wide range of people. The size of the P2P market today shows that it’s not reserved for a single demographic. There are obvious benefits for younger customers investing for the longer term and being prepared to possibly take on greater risk, but it attracts investors and borrowers of all backgrounds. At Lendwise, we have a range of investors across all ages who share in their desire to invest in the education of aspiring, career-driven individuals.
4. Borrowers turn to P2P lenders as a last resort
Alternative forms of finance can often be stigmatised by people who say they are only for borrowers who have been turned down by mainstream lenders. One of the greatest benefits of P2P lending is that it caters for a diverse and often specialist audience. The range of choice and often greater flexibility offered by P2P lenders is a big plus for many people.
For example, at Lendwise we serve individuals pursuing postgraduate degrees and professional qualifications. Student loans often fail to cover tuition or course costs and living expenses. Borrowing from a bank is often not a viable option because students require more flexible payment terms. We offer them the chance to advance their education and pursue their career goals on terms that work for them.
5. P2P lending is like crowdfunding
Both of these are considered alternative forms of finance and there is some overlap between the two but overall there are clear distinctions. Crowdfunding is a method of raising finance for a particular cause, project or business. Equity crowdfunding is one of the most popular forms and involves a business using an online platform to sell shares to investors.
In contrast, P2P platforms allow investors to lend money to creditworthy individuals or businesses. This is not in return for equity but for annual returns that can often supersede traditional savings accounts.
6. P2P lending offers a lack of liquidity
P2P investors are expected to commit funds for a fixed period based on the tenure of the loan they are lending against. On the Lendwise platform, an investor can find loans across a range of tenors from 1 year to 10 years. In addition, there are ways to increase liquidity and build a more diversified P2P portfolio. For example, investors have the option to lend to different borrowers, so they can pick and choose loans that vary in length.
At Lendwise, we also provide a secondary marketplace for investors, so they have the possibility to sell either all or part of their loans to another investor before the date of maturity. This has become an important part of the service we offer and ensures greater liquidity for those investors who need it.