Peer to peer lending is also abbreviated as ‘P2P lending’ or ‘crowdlending’. This phrase is used as an all encompassing phrase for the practice of lending money to individuals or businesses. Peer to peer lending is usually facilitated through an online platform like Ablrate.
The basic premise of peer to peer lending is that rates are higher for lenders and lower for borrowers. Th is because online businesses have lower overheads than traditional banks and operate more efficient processes. Even after the peer to peer lending platform has taken fees the rates passed on to lenders is significantly higher than savings products.
The difference between a peer to peer lending platform and the banks or traditional savings products is that there is, of course, a risk of the borrower defaulting on the loans made by lenders via the peer to peer lending platform.
The industry can span many forms and structures; some peer to peer loans are unsecured personal loans through companies like Zopa and others. The largest, by individual loan amounts, are to businesses.
In this category there are many models; unsecured peer to peer lending, lending against cars and jewelry on a ‘pawn broking’ model. Some specialise in student loans, payday loans as well as secured peer to peer lending like those originated by Ablrate.
Some models have interest rates set by lenders who compete for the lowest rate on an auction model. Ablrate had this function on our initial platform but we decided against keeping it for our current platform. We felt that it was confusing and ‘gameified’ the process of lending.
Some loans have a fixed interest rate which is set by the peer to peer lending platform as an appropriate rate for the risk being taken.
Platforms who are authorised by the Financial Conduct Authority and HMRC, like are able to offer the Innovative Finance ISA which allows lenders to allocate £20,000 per year to the IFISA where gains are tax free.
There are no government protections offered to lenders like the Financial Services Compensation Scheme so some firms seek to offer protection by ‘provision funds’ or insurance based lending. Provision funds have been questioned as to the effectiveness if default rates increased. On our Portfolio Loans Ablrate will be introducing ‘Provision Income’ which will be where Ablrate fees will be reduced and diverted to lenders in the events of defaults.
Peer to peer lending platforms make their money, primarily, by charging the borrower fees upfront and in the ‘spread’. The spread is the difference between what a lender gets and what a borrower pays. This is a similar system to how bank make profits when lending. Ablrate charges up front fees and trailing fees, which we believe aligns us with lenders better.
Some peer to peer lending platforms have a secondary market where lenders can buy and sell loans between themselves. Ablrate operates a unique market where bids and offers can be made. The market currently trades up to £80,000 per day.