P2P Lending in the UK and US
P2P lending has gained popularity around the world. In July 2012, P2P lending in the UK had already exceeded GBP 300 million and is growing at a rate of 60% p.a! [link]. In the U.S., the pioneers in this field are Prosper and LendingClub.
P2P lending companies build online platforms that connect borrowers and lenders. Borrowers utilize the platforms to gain access to an alternative source of funds and secure potentially competitive loan rates. On the other aisle, lenders evaluate and assess each borrower and become bankers in their right when they decide to lend to a borrower.
Peer-to-Peer Companies in the U.K .and U.S.
From a quick glance at the table above, 2 key attributes of P2P loans can be drawn:
- Retail investors receive much higher returns with P2P loans compared to bank deposits in both the U.K. and the U.S. (As of the date of posting, 1Y bank deposit rates are ~ 2% p.a. and ~1% p.a. in the U.K. andthe U.S. respectively.)
- Small minimum investible amounts ranging from S$20 – $$40 (equivalent). In current Singapore’s context, NO investment categories exist in such friendly, inclusive ticket sizes.
Granted, no single investment has zero risk, even for deposits. However, there are ways to mitigate the risks of investing in P2P loans. The P2P lending companies in the U.K. and the U.S. attempt to help lenders reduce the risks of default by having checks and controls on potential borrowers. Borrowers who are not able to meet their minimum criteria will not be able to borrow through the platform.
In addition, with investment amounts starting from GBP 10 in the UK to USD 25 in the U.S., investors can reduce their risks by diversifying and lending across different borrowers. Individual lenders can also emulate banks by employing some techniques of credit analysis, such as the 5Cs of credit, before investing in a borrower.
As an investor, I can’t wait for this innovation to reach our shores! I desire more accessible choices with better returns!