The biggest myths about peer-to-peer lending
By Luke O'Mahony | Fri 6 Nov 15
By Luke O'Mahony | Fri 6 Nov 15
"Peer-to-peer lending is unregulated"
The peer-to-peer sector proactively sought to be regulated for a number of years. In April 2014, the Financial Conduct Authority (FCA) gave peer-to-peer lenders interim permission to operate under full regulation. Platforms have now applied to the FCA to move from interim to full authorisation, and that process is likely to take a few months.
Regulation brings several key conditions for platforms: these include regular reporting on defaults, segregation of client money and procedures which must be in place to ensure that investors are still repaid if the platform itself ceases trading.
In addition to FCA regulation, RateSetter - along with other major P2P platforms - founded the P2P Finance Association in 2011 to promote best practice and sets standards to protect investors, such as the transparent publication of loan books and default data.
Our products are investments, so unlike savings they don’t benefit from the Financial Services Guarantee Scheme which protects money held in bank and building society accounts up to a limit of £85,000 (falling to £75,000 from January 2016). Like many other investments, capital is at risk – but with that risk comes substantially better returns.
As you’d expect, levels of risk return vary significantly across platforms, and the main risk to peer-to-peer investors is that borrowers do not repay their loan.
RateSetter manages risk firstly by lending only to creditworthy applicants, with just one in five borrower applications approved.
To offer further protection, RateSetter pioneered the creation of the Provision Fund, which steps in to repay investors if a borrower misses a payment. Although this isn’t a guarantee, to date, it has been so effective that no individual investor has ever lost a penny on our platform.
"Peer-to-peer lending is the same as equity crowdfunding"
Peer-to-peer lending platforms allow investors to lend money directly to creditworthy businesses and individuals, whereas crowdfunding platforms offer an investment which is more akin to stocks and shares – crowdfunding investors buy equity in young companies.
With high failure rates for start-up businesses, the risks and rewards in crowdfunding are much higher than in peer-to-peer lending and therefore crowdfunding constitutes a separate asset class.
You can read more about the differences between peer-to-peer lending and crowdfunding in our blog from August.
"You need a lot of money to get started"
Some investments have very high entry criteria – to invest in a buy-to-let property for example, you’ll need to buy a house or a flat, which is an expensive endeavour.
Peer-to-peer lending is much more accessible: with RateSetter, you can set up an account for free with no commitment. If you do decide to invest, you can do so with as little as £10, adding more if and when you choose, with no obligation.
Hopefully you'll find answers to your questions in our FAQ section.
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