Is social lending a creditable alternative?
Wednesday, 02 March 2011 02:11
With faith in UK banks and credit card companies continuing to fall, Ben Salisbury from Myfinances.co.uk takes a look at the benefits and disadvantages of social lending and puts some frequently asked questions on the subject to James Meekings, co-founder and director of social lending company Funding Circle.
With the banks reneging on their promises to lend to small businesses many firms are looking at other options to secure affordable borrowing with a quick turnaround. Social lending companies are proving an increasingly popular alternative for businesses that need funds for cash-flow or investing.
Interest rates on social lending sites such as Zopa, Yes-Secure and Funding Circle are lower than those available from credit card companies or personal loan providers. They also allow more flexibility to make early repayments, thus reducing the overall interest payable. Social lending sites operate online and have low fixed costs, one reason why they can beat the established company rates.
Social lending, also known as peer-to-peer lending, still set rates according to the credit score of the individual applying for funds, but, if you have a poor credit record, this can still be a way to access funds that you may be denied from other sources.
With the current rate available from traditional savings account providers very low, unable to even outpace current inflation levels in the UK, social lending sites can also provide better savings rates than traditional providers, typically around seven or eight per cent.
However, there are also obvious concerns about using your money via a new method. Is social lending secure? and how do you know if you are dealing with reputable people?
So, let’s ask James Meekings some questions about the pitfalls and security of social lending sites:-
1) Why should I consider social lending?
“Savings and investment rates have been at a historic low for some time now and there are very few ways for individuals to earn a good rate of return on their hard-earned money without locking in their money for many years. Even ISAs, despite being tax free, don’t give rates as strong as the average yield of 8.3% gained through Funding Circle. And most high interest fixed term bonds require you to lock your money in with no withdrawals for at least three years. Whereas at Funding Circle you can access your money at any point by selling your loan parts to other lenders, taking an average of two days.
“Although a strong rate of return is the priority for individuals looking to maximise their money, there are a number of other benefits when investing through Funding Circle. Most notably, you’re helping UK businesses borrow money at a cheaper rate and therefore helping the local and national economy. The majority of businesses come to us for funding to aid growth, many of whom are looking to expand and increase their workforce.”
2) Are there any guarantees or safeguards?
“At Funding Circle, we take risk very seriously. Firstly, our experienced underwriters assess every loan application using the same information that banks do and only allow established and creditworthy businesses into the marketplace. On top of this, most businesses provide personal guarantees on the loans.
“People then lend to lots of businesses to spread their risk and our Autobid feature allows them to do this easily in a matter of seconds. Funding Circle chases any late payments on behalf of the people who lend but to date there have been no missed payments.
“Funding Circle itself is a well backed company and has also put in place an S&P rated stand in servicer to service the loans in the unlikely event it was to cease to trade.”
3) Should certain people avoid social lending?
“Social lending should be considered alongside other forms of investment products, in a varied portfolio. The minimum amount an individual can lend to one business is £20 so certainly no-one is excluded by the amount they want to lend.
“We cater for two different types of investor. Those who want to lend money quickly to get a good return and those who want to spend more time choosing the individual businesses they lend to.
“Those who want to get a good return quickly use Autobid which automatically distributes their money across lots of businesses to spread their risk. Other people enjoy reviewing the businesses they lend to which gives them the sense of really helping to improve the British economy.”
4) How can I be sure that I am dealing with reputable people who have a good credit rating?
“Funding Circle carries out rigorous checks by experienced underwriters who assess every business loan application using the same information available to banks. This includes credit information from Experian, up to date financial figures, how they pay their bills and information on outstanding borrowings. Importantly, only established and creditworthy businesses are allowed into the marketplace.”
5) Do the mainstream banks see this new type of lending as a threat?
“Funding Circle is growing from day-to-day as more people learn and accept it as being a viable way of making good returns from their money. With current savings rates as low as 1%, and in some cases less, Funding Circle’s return of 8.3% yield is unrivalled when considering what banks and building societies are offering.
“We’re also gaining much support amongst businesses that would have been charged as much as five per cent more through a high-street bank. Not only is it cheaper for businesses, the quick turn-around of receiving the funds is a major factor.”
6) If the people who lend earn an average yield of 8.3 per cent - surely the people who they lend to are paying too much?
“Businesses who borrow via Funding Circle are doing so for two reasons – it’s cheaper to do so, and it’s quicker to get hold of the funding. Funding Circle has built a sophisticated technology platform which removes much of the overheads that banks have to pay. Combined with our low fees people are able to earn an average yield of 8.3% and businesses are able to save 25% on the cost of a business loan on average.”
Myfinances.co.uk will take a closer look at social lending sites later this month.
Use the Myfinances.co.uk comparison tools to find a better deal on loans and credit-cards.
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