By Giles Andrews, Executive Chairman and co-founder, Zopa
Over the past 11 years an innovative and popular form of finance called peer-to-peer (P2P) lending has been disrupting the traditional banking model enabling millions of people to bypass the banks and lend and borrow money directly in order to achieve better rates.
- P2P offers better value to investors and borrowers by matching people directly
- Zopa launched 11 years’ ago and has been through a credit cycle
- P2P will become a tax free way to earn interest through an Innovative Finance ISA and the personal savings allowance
Lenders and borrowers are matched directly online via a P2P lending platform such as Zopa, much like a match-making service for money. In fact, Zopa pioneered the concept back in 2005 by launching as the world’s first P2P lending service, which is now a multi-billion pound global industry.
It’s likely you already know someone who has lent or borrowed through a P2P service: Zopa alone has already helped more than 200,000 people with their finances, totalling more than £1.3 billion lent over the past 11 years, resulting in more than £60m earned in interest for our lenders.
The principles behind P2P loans are simple. Money is provided by individual investors and, in Zopa’s case, then matched up to a wide number of borrowers in the form of small micro-loans, typically £10. This ensures individual investors are well diversified and reduce their risk exposure to any individual borrower if they fail to pay back their loan. As P2P firms don’t have the massive overheads and branch networks that banks have, the cost advantages can be passed on to customers directly in terms of better rates.
P2P has grown rapidly in popularity not just because of better rates but because the service is simpler, easier and more transparent than traditional banks. With bank interest rates at a very low level and stock-market volatility increasing, P2P lending has become an appealing and reliable investment option, offering average returns of 5 per cent.
For lenders, this means a higher return than they would get on standard deposit accounts. Currently, for example, typical returns for Zopa lenders are running at around 5 per cent AER although your capital is at risk when you lend.
The UK government has now brought this alternative form of investing under the ISA umbrella with the introduction of the Innovative Finance ISA (IF ISA) in 2016. Gaining ISA status will provide an important boost to consumer confidence in the sector as well as general awareness.
As well as the IFISA, it is worth noting that a new Personal Savings Allowance is coming into force in April: together, these changes mean that for the vast majority of investors, P2P lending will become a tax free investment from April 2016, this is a huge positive for new and existing customers.
Learn more at Zopa.com