Peer-to-peer (P2P) lending is controversial, to say the least. Despite the success of Zopa – which in total has loaned £1.4bn – many are distrustful, not least Lord (Adair) Turner, who recently said P2P platforms “make the worst bankers look like absolute lending geniuses”.
None the less, they have been given the stamp of approval from the Treasury, with the launch last week of the Innovative Finance (IF) Isa, which allows lenders to put money for lending, and interest they receive, into a tax-free account. These products are not protected by the FSCS, however.
For Andrew Lawson, chief product officer at Zopa, it is his job to steer his company’s IF Isa towards legitimacy by receiving full permissions from the FCA in a couple of months.
However, he is taking cautious steps about launching it into the market. He said: “We as an industry are lending out around £200m a month of money, and the 2014/15 Isa subscription was £78bn, with the majority of that happening in April. If we got 25p on every Isa subscription, that’s our entire lending in one go.
“It’s important not to get drunk on liquidity. Our lending criteria is our lending criteria and getting a wall of Isa money is not going to change that. If you can’t lend it out it’s an unhappy experience for all.”
It is for this reason that he is not actively pitching to financial advisers, or trying to get onto any platforms, any time soon.
P2P platforms work on the basis that a lender – an individual – will agree to lend money to a borrower, either a business or individual, for an agreed rate of interest. With Zopa, the loan is spread over a number of lenders, and the rate of interest is set by the platform.
This is based on the borrower’s credit profile, which Mr Lawson said is done carefully by the platform. A borrower – in Zopa’s case, an individual – will on average pay about 8 per cent, although some will pay about 3.5 per cent. Lenders’ interest rates are determined by Zopa, but start at between 3 per cent and 4 per cent.
He said: “The market we operate in for personal unsecured loans has tremendous data. When a borrower applies for a loan, we look at their performance on previous loans, and how much debt they have, and we run that through a score card. We look at disposable income and debt-to-income.
“We’ve stuck to ‘super-prime’ unsecured personal loans. Our loss rate on these loans has been better than High Street banks’ unsecured loan portfolio.”
Zopa’s default rate is 0.8 per cent, and its profiling of its customers has attracted Metro Bank, which lends money through the platform.
Mr Lawson said that a typical borrower is someone who is using the money for home improvements, or debt consolidation. A typical loan repayment period might be five years, but many pay off early, he said, helped by the absence of early repayment charges.