No. of Recommendations: 6
Just trying to write my own thoughts down as I become more and more invested in these P2P websites. Particularly as:

1) Not many others seem to be doing the same
2) Some think that to do so is madness, as they are too good to be true, and/or you are liable to lose money.

For 1) above, it seems that a lot of people just do not know they exist, although projections are that by 2020, £16 Bn will be 'invested' in the UK alone.

As for 2) above, it is correct that the P2P websites are NOT covered by the FSCS guarantee. Also, Adair Turner ( the former chairman of the UK financial regulator) has said that P2P will make Bankers during the last Financial crash, look like geniuses. But, he never said why.....
It seems that these websites can be split into 2, where some do unsecured lending to other people for around 6% to Lenders. And others have secured (ie asset backed) lending for around 10-12%.

Why are their lending rates so much more than Banks or Building Societies, who do much the same thing? Are their rates too good to be true?

It seems that P2P have 4 advantages over Banks, etc:

a) They perform the loans over the internet, making the whole process for Borrowers, that much more easier. It also enables new forms of Borrower credit checking to be performed. NB Banks borrowing process involves their old unwieldy bureaucratic ways. This means that P2P have low processing costs.
b) Because they 'matchmake' rather than lend from one company, the regulation on them is 'light'. NB Bank regulation is much tighter. Meaning P2P costs are lower.
c) Following the last Financial crash, many Borrowers are refused by the Banks and so turn to these alternative lenders.
d) Less pressure to achieve large profits

So it seems that these websites can offer better lending rates, due to less costs, and also being able to charge more to Borrowers who have no alternative. For some Borrowers they can almost charge what they want. Indeed the market is being formed by the Borrower rates they currently charge. These rates may go up if/when the BoE interest rate goes up.

So what of the future:
It seems that more players will come into the market, and particularly more Banks etc (who either compete directly or collaborate with existing players. I would expect some existing players to be bought out by some of the big Financial institutions). The current players will get larger, but some may not be able to get enough Borrowers and/or Lenders. Indeed, the pressure will be on for some of these websites to take on loans that are not good.

Also, currently, they are all under pressure not to have too many default loans. Otherwise it will give P2P a bad name.

So, now may be the best time to invest in P2P. In the future, some will go badly wrong and thus you may indeed lose some or all of your investment........ (however, by then P2P may well be covered by the FSCS). Who knows? Maybe P2P is a disruptive idea that will prove a great new investment possibility, or it may prove that it is indeed too good to be true.


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