Often referred to as “crowd-lending”, the websites cut out the traditional banking middle-man which results in lower rates for borrowers and higher returns for savers. The sites typically create profit by charging a small fee on top of each transaction.
Some sites advertise returns of as much as 8% and can increase up to 25%, making them very attractive options to savers who otherwise face savings accounts of negligible value offered by banks. Today, a saver is lucky to get anything more than 4 or 5% from a bank.
They do require that you save the money for longer though and typically has more associated risk than a standard savings account from a bank. Accounts are not insured and there is nothing to protect you should a borrower default. You could end up losing everything you loaned.
The practise is safer than investing in things like binary options where large amounts of money can be exchanged very quickly but still not without its problems. Peer-to-peer lending is now regulated in the UK but there is still no savings safety guarantee. For borrowers, there is no assurance that the cash will be lent straight away.
The industry has grown from nothing to a multibillion-dollar practise in just 10 years, pioneered by London-based Zopa in 2005. 58,000 lenders have funded more than $750 million to 107,000 borrowers who went on to use the money primarily on consumer items. These include cars, home improvements and renovations and even weddings.
The lenders on the site collectively made $67.8 million with an average return of 5.6% after fees. This shows how lucrative peer-to-peer lending can become as you are automatically matched with borrowers who are happy to take money from you.
