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The current economic conditions have helped fuel this growth: tighter lending conditions have made it hard for many people to arrange affordable personal loans, and savers, fed up with the paltry returns on the high street, have been attracted by returns of 8pc or more.
But anyone considering lending on one of these sites should carefully weigh the risks involved. This is an unregulated area and if a borrower defaults, you can lose some – or all – of your money.
Zopa remains the biggest fish in this pond, launching five years ago, and has arranged loans of ￡110m.
Despite the difficult economic circumstances, just 0.7pc of the money lent has not been repaid
Its success has spawned a host of other sites, keen to make money from this burgeoning market. But the way they operate can be very different. In some cases, default rates look set to be significantly higher, particularly if the economic conditions worsen.
Peer-to-peer lending has a more chequered reputation in the US, after one company included far more higher-risk borrowers on its books, many of whom defaulted when the recession bit, causing significant losses for those who had stumped up the cash.
More details on each of these sites now operating in Britain is given below.
But before committing your money, keep these golden rules in mind. Remember, the higher the rate, the higher the risk. If a site is advertising returns of 20pc or more, you are taking serious risks with your capital. Look to diversify. Lend to one person and you risk losing it all, but if your money is spread between 20, 50 or more borrowers, this risk is reduced. Some sites will do this for you, but others don't.
And finally, don't believe everything you read. Look carefully at what information is verified by third parties, and what is simply provided by the would-be borrower. They may claim to be a good risk, but is there any independent evidence to support this? Investment decisions should be based on more than personalities and hard-luck stories.
www.zopa.com
Launch date: March 2005
Amount lent to date: ￡110m
Default rate: 0.7pc
Fee paid by lenders: 1pc of the amount lent
Fee paid by borrowers: Flat fee of ￡124.50 once loan is approved
Profile of borrowers: Only lower-risk borrowers accepted, generally A* to C
Average return for lenders: 8.1pc over past year, after charges
Spread of payments: No more than ￡10 with any one borrower
Fund to cover bad debts: No
Zopa's success has largely been down to its strong risk controls. It screens all potential borrowers, looking not only at their credit history but at affordability factors too. "Checking this can be time-consuming, but we think it is important to do," said a spokesman. "Many people may have a good credit score, but if they are taking on debt they would struggle to repay, we don't want them." More than 75pc of borrowers who apply are turned away.
Lenders are invited to choose which type of borrower they want to lend to and how long they want the loan to be. In each category there will be a range of rates displayed and lenders then set the return they want to earn on their money.
If they go lower than the suggested range, then their money will be snapped up instantly; if they go higher they may struggle to attract lenders. Their money is parcelled off into ￡10 packages and distributed to lenders in the given category who are looking to borrow at these rates. You don't know who these people are, nor what they are borrowing the money for. You can further diversify by spreading your money between these different lending groups.
Zopa does also run a listings service, where individuals give more information about why they want to borrow money, but the site admits default rates are higher for those who choose to lend in this way.
www.ratesetter.com
Launch date: October 2010
Amount lent to date: ￡730,000
Default rate to date: None so far, expect rate lower than 1.4pc
Fee paid by lenders: 10pc of the interest they receive
Fee paid by borrowers: ￡115 flat fee for a three-year loan; ￡5 monthly charge in the rolling market
Profile of borrowers: Prime risk, primarily A and A*
How checked: Credit reports from Equifax and CallCredit, plus manual assessment.
Average return for lenders: 7pc for three-year loans; 3.3pc in monthly market
Spread of payments: Money spread between all borrowers, regardless of their credit risk
Fund to cover bad debts: Yes
The key differential here is RateSetter's "provision fund" to cover bad debts. This is paid for by the borrowers, via an additional rate charge. Lenders all receive the same rate, set by the market on the site any given day. However, the APR paid by the borrowers depends on their credit risk, those deemed a higher risk pay a higher APR. These additional payments are paid into this fund.
This fund isn't guaranteed to cover all defaults in full. Currently, it covers six times the expected losses; if defaults exceed this, lenders will lose out. But if defaults are less, surplus money is paid back to lenders, via a bonus.
Peter Behrens, a co-founder, said: "We think it is important to monitor the risk of borrowers on the site. Only about 10pc of applications get through at present. We think lenders want a market-beating rate, but don't want to take on the additional risk of vetting individual borrowers."
RateSetter also offers a rolling month-long contract, which may be attractive to those who don't want to lock their money away for long periods, although they will get a lower return as a result.
www.fundingcircle.com
Launch date: August 13 2010
Amount lent to date: ￡1.3m
Default rate to date: None to date. Expected default rate of between 0.3 to 2.6pc, depending on risk profile of business
Fee paid by lenders: None currently; next year will introduce 1pc annual fee, charged monthly from repayments
Fee paid by borrowers: Upfront 2pc fee of the amount borrowed
Profile of borrowers: Low-risk businesses. No start-ups
How are borrowers checked: Each business screened by in?house team
Average return for lenders: 8.2pc
Spread of payments: Encouraged to diversify. Money spread between a minimum of 20 companies if using automated lending tool
Fund to cover bad debts: No
The twist here is that money is lent to small businesses, rather than individuals. James Meekings, the co-founder of the site, said they were aiming at low-risk businesses struggling to get finance from the banks at affordable rates.
All firms are screened, and while they must have at least two years of audited accounts, many will have far longer trading records. He said: "Many of our borrowers are family businesses that have been running for 20-plus years." About 40pc of the companies lent to are in the manufacturing sector.
However, he stresses that lending money to businesses is not without risk and this is reflected in the returns paid.
The maximum interest that can be earned is 15pc, but the average is nearer half this.
"In many ways these are not comparable with the returns paid on savings accounts, where there is very little risk involved." He said a fairer comparison is the returns made from corporate bonds.
Lenders can opt for an "autobid" tool where they set the rate they want, and money is automatically distributed between companies looking to borrow at this rate.
www.yes-secure.com
Launch date: June 2010
Amount lent to date: ￡150,000
Default rate to date: None. Expects default rate of up to 12pc for higher-risk borrowers.
Fee paid by lenders: 0.9pc
Fee paid by borrowers: ￡80 flat
Profile of borrowers: From A* to E
How are borrowers checked: Rating based on CallCredit report. Yes-Secure asks for a copy of their payslip and a recent bank statement
Average return for lenders: Rates advertised from 15 to 30pc.
Spread of payments: Lenders contribute 5pc of the sum asked for; rising to 15pc if you have made an "online connection" with the borrower
Fund to cover bad debts: No, but plans to launch one soon
www.quakle.co.uk
Launch date: October 2010
Amount lent to date: ￡16,000
Default rate to date: None. For A and B-rated borrowers it is anticipating a default rate below 1pc; for C and D-rated borrowers less than 3pc
Fee paid by lenders: None
Fee paid by borrowers: 1.5pc of loan once it's agreed
Profile of borrowers: Lower end – 70pc of borrowers are C-rated
How are borrowers checked: Grade dependant on credit reports from Equifax
Average return for lenders: 23.5pc
Spread of payments: Low at present. Aims to create "auto-lending" function in future to increase diversification
Fund to cover bad debts: No
Both these sites are basically listings, where borrowers explain what they want the money for and the rate they want to pay.
Lenders are invited to bid for this business, often pledging just a small portion of the amount asked for. The loan is only granted when it is fully funded. Often the only verified information is the credit score provided by the relevant agency. Other personal information, such as their job, whether they own their own home, and what other debts they have might not be independently checked.
Neither site has a track record to speak of yet, and the "average return" is the APR rate paid by the borrower. If they default, then the return the lender gets will be far less. It is interesting to note that on Yes-Secure, for example, that even A borrowers are often paying rates in excess of 20pc. This indicates that the "market" of lenders on the site is taking these credit ratings with a strong pinch of salt.
Both seem to attract many borrowers at present that would be turned down by other peer-to-peer lending sites, and as such remain a very high risk option for those lending money.
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