Lending money has been in the headlines recently with the furore surrounding pay day loan companies who are charging thousands of percent on loans. Mind you those loans are meant to be paid off in a few days when your pay comes in. Banks are in the firing line as well on unauthorized overdraft charges that can amount to thousands of percent as well.
Now it is the turn of the peer to peer lending websites to be in the news. This is where a savers can lend to a group of borrowers directly at higher interest rates than they would receive on their deposits.
Over the past 18 months, £192million has been switched from savers’ accounts into these websites, which include Zopa, Funding Circle, RateSetter and Yes-Secure
News that Quakle is closed for business has unsettled savers. Their website says they will need to chase borrowers directly.
There are two major risks with peer-to-peer lending. The most obvious is that borrowers may not be able to pay so returns may be less. However by spreading your loans across lots of borrowers the sites have you believe the risk is less. But, of course, if rates are high it is because you are lending to alot of risky borrowers. The other risk is that the company arranging the loans could fail and you will need to collect the money yourself. Also such monies are not covered by the compensation scheme.