16 May 2013

Peer-to-Peer Finance – the way of the future?

Peer-to-Peer lending (otherwise known as social lending) is a growing trend around the world where ‘borrowers’ are introduced to ‘lenders’ – any person looking to make interest on their savings by lending it through these structured websites. Borrowers are able to gain access to money without having to deal with the big banks, and lenders gain attractive interest rates.

How does it work?

People who want to borrow money apply online are catagorised into credit ratings – from excellent through to very poor. Lenders choose the risk that they want to take as higher risk borrowers yield higher rates of interest. The loan is then divided amongst a group of lenders, so that any one person is not taking on all the risk. The loan is a legally binding contract, and borrowers must pay the lenders throughout a designated time period, with the agreed interest.

What are the pros?

For borrowers, it can be a much better experience than dealing with the banks. In Australia, the banks account for 84.6% of all personal loan transactions, but the satisfaction rating is exceptionally low. For lenders, they can achieve great interest rates (depending on the risk that they want to take) and the rate of return is high, as people seem more inclined to pay back real people than the faceless banks.

What are the cons?

At the moment, Society One is the only substantial example in Australia, so the industry is definitely in its infant stages. While all loans taken out in this way are legally binding, the truth is that the industry itself is not yet regulated, so there is still a degree of risk when undertaking these loans.