The way peer to peer lending works is by a company, a middle man between investors and companies, grouping the companies that need to be invested in by their risk, and potential return, the investor can then choose who they want to invest in.
As aforementioned, this scheme is growing so much due to the fact that the banks aren’t lending. However, in conjunction with this the format is solely based online meaning that it is extremely easy to sign up to the scheme, and for the lenders to search the company that they may be investing in. It is also useful for the company looking to be invested in, as when all their information is on the database then it is only a matter of time until they get the money they need. As it is online it also means that loans can be processed extremely quickly and money can be transferred much faster that many other ways of lending.
In the last three years the market for this type of lending has trebled and analysts have predicted that if this type of growth continues over the next few years then it could be worth £1bn by 2016. They typically offer much better interest rates than bigger banks, where smaller businesses can often find rates of 8%, and investors can on average find returns of 6% and up to 15% if they are willing to take bigger risks on different ventures.
There are three websites that dominate 92% of the market in the UK, those being Zopa, RateSetter, and Funding Circle. The rest of the 8% are much smaller regional peer to peer lending companies such as Folk2Folk in the South West of England.