Anything with the words “peer-to-peer” (P2P) in it reminds me of my time in research. It is not the same but it oddly reminds me of peer review, and being approached to critique research articles prior to publication. Peer review (from the research and publishing perspective) has some parallels in the sense that peer reviewers and authors exchange services within their (scientific) network, organized and moderated by their publishers. As a research scientist you are expected to spend some of your time as a peer reviewer. The system is based on parties participating and reciprocating, to vet new publications prior to publication. In peer review, just as in a broader “peer-to-peer” concept, resources (in this case time and expertise) are made available to the community and participants make use of these resources. To the lay person, peer-to-peer may be more reminiscent of illegal sharing of content. To me it will always remind me of the scholarly peer review process.
Putting P2P in peer lending
Peer lending brings the P2P concept to banking. Instead of a bank functioning as a lender and holding all the cards, individuals make their funds available to borrowers. The benefit goes both ways: lenders looking for better returns on their money are matched with borrowers looking for lower interest rates on their loans.
Some might argue not a lot is left at the end of the month when you live in one of the world’s most expensive cities. This only makes it more critical to make the most of your investments. At least that is how I look at it, and I am a firm believer in paying yourself first. Leaving savings in a regular bank account is not providing the returns they once did, and more people are looking for investment opportunities. Risk of the stock market is keeping many away from stocks and bonds. Some of my family members have lost big in the tech crash and the financial crisis. Without having the time I believe I need to properly research stocks, I am also staying mostly away from stocks. Peer to peer lending has been an interesting alternative. Higher returns always come at a higher risk however. Peer to peer lenders may not offer any guarantees and typically it is possible to lose your investment.
My experiences peer lending through Zopa
The idea of peer lending was interesting enough to get me curious. Unfortunately, when I first looked into it, the option did not exist in Canada. Once I started spending considerable time in the UK, it became a viable option to test out through Zopa. This is a London based company, and is the world’s oldest and Europe’s largest peer-to-peer lending service. This system works by bringing together individuals who have money to lend, and individuals who wish to borrow money. Zopa handles all the details: vetting borrowers and processing loans and payments. They have been in business since 2005 and more than 63,000 people have lent over £1.22 billion through the service. For a couple of years I have been one of them.
One of the major draws to Zopa was their low minimums: you can get started with just £10. This means anyone with modest savings can try and make the most of it by lending to others. To diversify risk, Zopa lends your money to many different borrowers. Provided you loan out more than £10, your money is never given to just one borrower, and the risk of losing your entire capital becomes small. Supposedly no investor has lost money yet, but it is possible and Zopa is not (yet) protected by the FSCS. On the other hand, it is trusted by major financial institutions and Metro Bank is now also lending on Zopa. There are some investors who have millions in Zopa accounts, but most account holders are like me, and invest modest amounts. Your money is locked in for 3-5 years, so it has to be an amount of cash you are comfortable not using for a while. Early redemption is possible but at a 1% fee. When you are earning 4-6% returns on your money, even that 1% penalty is not the end of the world if I really needed the money. If you do not reinvest your returns, you receive regular monthly payouts of your principal and interest. Reinvesting your repayments is the most effective way of maximizing your returns.
If interest rates rise again in the near future, it would be interesting to look into traditional savings account again and enjoy the protection offered by the FSCS. For those amongst us who like to think of themselves as speculators, but are risk averse at heart, this is a relatively low-risk option that still delivers reasonable returns. I am not a financial advisor, but I like to experiment a little at times with investments. So far, my experience lending through Zopa has been overwhelmingly positive and I would recommend it if you have some savings you do not need to access right away.
To boost your savings further, if you sign up to Zopa using this link and either invest £2000, or borrow £2000, you can receive a bonus of £50 in your account.