The continuing reluctance of banks and traditional financial institutions to lend to cash-starved small businesses and consumers has undoubtedly slowed the country's economic recovery. However, the emergence in recent years of the innovative alternative finance sector, which includes peer to peer (p2p) lending platforms, has provided much needed liquidity and an opportunity for both savers and borrowers to obtain credit at extremely competitive rates.
Consumers and small and medium-sized businesses rely on the availability of borrowing funds to finance both personal purchases such as a car or home improvements, and business expansion and investment. However, they are consistently being held back by a shortage of credit being made available by traditional financial institutions. Savers, meanwhile, are being forced to watch their savings stagnate as interest rates have remained at record low levels, often below the rate of inflation, for a sustained period. So, with both borrowers and lenders both looking for an alternative to mainstream banks, it seems only logical that they should join forces. Peer to peer lending platforms provide the opportunity for lenders and borrowers to connect, so both receive a much fairer deal. Below, we look at how peer to peer lending works, and discuss whether peer to peer lenders really can become a viable alternative to high street banks.
How does peer to peer lending work?
In general terms, peer to peer lending works by putting lenders and borrowers in direct contact with each other, albeit anonymously. This cuts out the banks altogether, avoiding their high interest charges and hefty arrangement and early settlement fees that are often charged. Typically, funds lent through peer to peer platforms are lent not to one or two borrowers, but split over many in order to diversify the risk of borrower default.
So, personal loan borrowers and small businesses gain access to low rate loans . At the same time, lenders earn a rate of interest significantly higher than rates which can be offered by banks. By cutting out the financial institution in the middle, everyone benefits.
What can peer to peer loans be used for?
While some peer to peer services specialise in providing business loans, others provide loans to individuals using the same process. Whether the loan is for the purchase of a car, home improvements or a holiday, individuals with a strong credit history and who can demonstrate that they can afford to repay their loan would be eligible to apply for a peer to peer loan. Peer to peer platform providers perform stringent credit and affordability checks to ensure that borrowers can afford to meet their repayments, but what the loan is spent on is up to the individual.
Businesses can use the funds to invest in new equipment, invest in premises and generally drive their sales forward. Thousands of small and medium-sized businesses have either stagnated or gone under since the banking crash of 2008, a situation which has not been helped by traditional lenders cutting lending levels so drastically. It is hoped that this innovative alternative finance sector will save countless companies from a similar fate.
Why peer to peer lending is a viable alternative to traditional savings accounts
The Bank of England and most of the central banks around the world have kept interest rates at record lows for several years now. This has left those with savings worried about their diminishing capital. Because the rates being offered by mainstream financial institutions are very often below the level of inflation, the value of savings is actually falling in real terms.
With the recent emergence of the alternative finance sector, ordinary people now have a way of obtaining impressive returns on their hard earned savings. In many cases, individual lenders are now enjoying returns of more than 10 times those offered by traditional savings accounts, making this type of investment increasingly popular.
If you're concerned about your diminishing savings due to the sustained period of low interest rates offered by mainstream banks, you now have a viable alternative. By lending directly to prime borrowers through a p2p lending platform, you can obtain market leading rates of return on your investment which quite simply cannot be matched by the current offering from high street banks.
Lending Works is a peer-to-peer lender that matches thoroughly underwritten personal loan borrowers to shrewd lenders so both receive a much better deal. Lending Works is the first peer-to-peer lending company that protect its lenders against borrower default. For more information, please visit – www.lendingworks.co.uk.