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Will social lending force banks to cut loan rates
After three interest rate rises in quick succession UK consumers, already heavily burdened by debt, are understandably keen to seek out new means to raise funds, but the concept of social lending remains a relatively new one.
Social lending is based on the principle of peer to peer lending and has come about thanks to the web, putting people who want to borrow money in touch with those who want to lend it. Intermediates facilitate the agreement and to ensure that both sides are treated fairly.
Exotic though this may sound, a recent study by a think-tank called the Social Futures Observatory found that three quarters of consumers would consider borrowing online through a social lending community.
Less of a surprise to anyone who has experience of unsecured loans arranged through a more traditional high street lender is that well over half the survey’s respondents thought that rates charged by banks on borrowing were unfair when compared to savings and investments.
Even bankers themselves felt that the high street banks were not offering the best value when it came to loans, with more than 64% saying they’d received charges from their principle bank, which were unfair or unreasonable.
Online social lending portal Zopa is one example of this new breed of financial institution, and the study - which surveyed members of the community - said 8 out of 10 people who had used the service felt they’d secured a better rate than would have been available through a high street bank.
Different individual lenders on the site will offer different interest rates, just as different vendors on ebay will sell the same items for different prices. The rate on offer will usually reflect the degree of risk the lender is prepared to take. Higher rates will indicate a higher tolerance of risk and a diminished likelihood of being paid back in full. Cautious lenders will receive lower rates. Those who want to borrow must first have their creditworthiness rated by Equifax.
Social lending can be used to acquire funds on a small scale, for example enough to buy a new car or refurbish part of your house, but equally you could even raise enough to buy a house - or at least significantly reduce the amount you’d need to borrow as a mortgage.
Large loans are split between many different individuals, so the risk to each is manageable, making even ambitious fundraising projects - which might normally require a secured loan from a high street banker - a realistic possibility.
A spokesman for Zopa said: "Social Lending makes much more sense than the traditional banking model. Banks have huge overheads and they take far more than their fair share of people`s money because so much lies behind the scenes.
"Social Lending works because you get a fairer deal on an open marketplace than behind closed doors."
Sophie Neary, product director at BeatThatQuote.com, said: "Social lending is a fascinating new development which empowers you as a consumer with the maximum choice. BeatThatQuote.com can help you make that choice with loans from the UK’s leading providers, whether that be a debt consolidation loan, an unsecured loan for a new car or a holiday, or even a cheap bad credit loan to help you make a new start - we’ll help you make the right decision."
2008-03-20
