Social Lending - An Alternative

To traditional investing and borrowing

Here's the dilemma! People with savings are fed up with the fact that interest rates are so poor and their funds on deposit are losing against inflation.

People who want to borrow funds are getting charged extremely high rates from financial institutions relative to a low Bank of England interest rate. 

Welcome to social lending as an alternative option.

Social lending is a new way to borrow and lend money online with other people.  It’s a way of matching people who wish to invest money to achieve better returns, with people who wish to borrow money at a lower interest rate. 

The banks are not involved, just people.

There are a number of sites that are available to match investor and borrower – a bit like a dating site! They include ZOPA, RateSetter, Funding Circle, Quakle and Yes Secure. 

Some of these sites differ in what they seek to offer. For instance, Funding Circle is aimed at small businesses, Ratesetter is for funding to help cover bad debt and ZOPA is person to person. 

Many such as ZOPA offer a lot of financial checks, including affordability and credit history. ZOPA also looks to diversify the investors risk by spreading the funds of the person who is loaning the money across many borrowers within the same risk category.

Social lending has not been around for very long and is gathering momentum. The sites are claiming that over £100m has been lent to date.

It must be stated that this type of lending is currently unregulated and not covered by the Financial Services Compensation Scheme (FSCS).  As there is also a level of risk involved, social lending should be viewed as an investment and not as if it were normal funds on deposit.

For more information, visit www.sociallending.org.uk

Article by Max Spurgeon
Director and Independent Financial Adviser at Legal & Medical Investments
May 2011