Consumer lending refers to loans taken out by individuals for personal reasons.
The world’s first ever peer-to-peer lending platform (Zopa) launched in the UK in 2005 focusing on unsecured consumer lending. Since that launch, the consumer lending market has significantly increased in size, with the majority of growth taking place from 2011 onwards (illustrated below).
Source: Cambridge University, The 5th UK Alternative Finance Industry Report
Fast-forward to today and there are now seven peer-to-peer lending platforms focused on consumer lending in the UK.
We have segregated these seven platforms into three subcategories:
- Unsecured lending (up to 5 year underlying loan term length)
- Unsecured lending (short term lending, up to three months)
- Secured lending (i.e. asset-backed)
Unsecured consumer lending (up to 5 year underlying loan term length)
There are three UK-based unsecured consumer lending platforms focusing on short-medium term loans:
RateSetter (launched 2010)
RateSetter is one of the UK’s big three peer-to-peer lenders, alongside Zopa and Funding Circle. It first launched in 2010 and has gone on to issue over £3.2 billion of loans (the majority of which are unsecured consumer loans, but the platform does have relatively small exposure to unsecured business loans and secured property loans).
- Target interest rates – Currently 3.0% for the Access account (no fee to withdraw), 3.5% for the Plus account (release fee of 30 days interest) and 4.0% for Max account (release fee of 90 days interest). You can theoretically obtain an interest rate of up to 5.0% over these rates by setting your own interest rate.
- Provision fund – The platform operates a provision fund, which is funded a proportion of the platforms margin (i.e. the difference between the interest rate the borrower pays and the interest paid to investors). Projections performed by RateSetter suggest that the expected loss rate would need to be 4x higher than expected before investors would make a capital loss.
- Self-select vs. auto-investment – As with all other lenders within this subcategory, there is no self-select investment option with RateSetter. Whilst you are investing without knowledge of the underlying loan, you are matched with individual borrowers. However, as the provision fund is fully integrated, you are ultimately exposed to all loans on the platform (which I view as positive due to increased diversification). For example, if the bad debt provision were to be depleted, RateSetter would proportionally divert a proportion of each investors loans/interest into the fund to cover the loss.
- Secondary market / ability to resell – Early access to funds is possible, subject to demand and the release fees noted above.
- IFISA – Yes, RateSetter offers IFISA accounts.
- Minimum investment – You can invest in RateSetter from just £10.
- Cashback offer – Yes, £20 cashback for a £10 investment available via this referral link.
Zopa (launched 2005)
Zopa was the first ever peer-to-peer platform to launch worldwide in 2005 and now remains one of the ‘big three’ platforms in the UK P2P market having lent over £4.0 billion over the last 7 years. Similar to RateSetter, Zopa offers unsecured personal loans to UK borrowers. The key difference between the two platforms is that Zopa no longer operates a provision fund with the platform primarily seeking to reduce investor risk via diversification (i.e. your funds spread across a large portfolio of loans).
- Target interest rates – Between 4.5% (Core, exposure to A*-C risk markets) and 5.2% (Plus, exposed to riskier loans, A*-E risk markets).
- Provision fund – Unlike RateSetter and Lending Works, Zopa does not operate a provision fund.
- Self-select vs. auto-investment – As with all other lenders within this subcategory, there is no self-select investment option with Zopa.
- Secondary market / ability to resell – Yes, investments can be sold via a secondary market (subject to investor demand) but will incur a 1.0% admin fee.
- IFISA – Yes, Zopa offers the ability to invest via an IFISA account.
- Minimum investment – You can invest in Zopa from £1,000.
- Cashback offer – Yes, £50 cashback for a £2,000 investment (must be held for one year) available via this referral link.
Lending Works (launched 2014)
Lending Works isn’t anywhere near as big as RateSetter or Zopa, but it is still a large peer-to-peer lender having lent over £180 million to date. The platform exclusively offers unsecured personal loans to UK borrowers and similar to RateSetter, offers a provision fund to protect against losses (subject to available funds). In addition to the existence of a provision fund, Lending Works has insurance to protect against borrower default caused by loss of employment, accident and sickness or death.
- Target interest rates – The platform targets 3.8% p.a. (no fees to access funds) or 5.4% (with 0.5% fee to access funds).
- Provision fund – Yes, Lending Works offers a provision fund, which is funded by a risk-weighted portion of the fees and interest payable by borrowers. The provision fund is maintained at a level which Lending Works deems sufficient to cover the expected rate of arrears and defaults.
- Self-select vs. auto-investment – As with all other lenders within this subcategory, there is no self-select investment option with Lending Works.
- Secondary market / ability to resell – Yes, you can sell your investment provided there is demand, subject to the fees noted above.
- IFISA – Yes, Lending Works offers IFISA investment accounts.
- Minimum investment – You can invest in Lending Works from just £100.
- Cashback offer – Yes, £50 cashback for a £1,000 investment (must be held for one year) available via this referral link.
Unsecured consumer lending (short term, up to three months)
There are two UK-based unsecured consumer lending platforms focusing on short term loans:
Fund Ourselves (formally known as We Lend Us, launched 2017)
Fund Ourselves provide short-term unsecured short-term consumer lending. The platform differs from others in the consumer lending space in that it offers investors the ability to lend exclusively to higher risk (or lower risk) borrowers if desired.
- Target interest rates – Between 5.0 and 15.0% (investors are able to set their interest rate which determines the risk profile of underlying borrowers they are exposed to).
- Provision fund – Yes, Fund Ourselves does offer a provision fund, funded via a provision investors fund fee which is included in the loan interest charged to borrowers. The provision fund cannot be considered a guarantee as it is subject to fund availability.
- Self-select vs. auto-investment – Fund Ourselves solely offers auto-investment based on your own target interest rate, with no ability to manually invest in individual loans. The auto-investment splits your investment across a minimum of 10 loans.
- Secondary market / ability to resell – Yes, a secondary market exists with no associated fee for buying or selling investments.
- IFISA – Yes, Fund Ourselves offers the ability to invest via an IFISA account.
- Minimum investment – You can invest in Fund Ourselves from just £100.
- Cashback offer – There is no cashback offer available at this time.
The Money Platform (launched 2016)
The Money Platform is a high risk platform enabling investors to provide funding for short-term ‘payday’ style loans. Investors can provide individual loans of £250, £500, £750 or £1,000. Interest rates are very high (0.7-0.8% per day) but the risk of borrower default is very real and the way the platform is setup makes it difficult to diversify lending across a large number of loans unless you are placing significant funds on the platform. All lending is unsecured i.e. no security is provided.
- Target interest rates – Interest rates are set at 0.7-0.8% daily. Do not consider this number in isolation – the risk of capital loss is high.
- Provision fund – No provision fund exists.
- Self-select vs. auto-investment – Investors are provided no information about underlying borrowers and are presented with the option to invest £250, £500, £750 or £1,000 in a singular loan.
- Secondary market / ability to resell – Once you are invested, there is no way of selling your investment.
- IFISA – No IFISA account is offered.
- Minimum investment – £250
- Cashback offer – There is no cashback offer available at this time.
Secured consumer lending
There are two UK-based secured consumer lending platforms:
Unbolted (launched 2014)
Unbolted focuses on secured personal lending (also known as ‘pawnbroking’ style loans), with all secured assets held by Unbolted until repayment is made. The majority of borrowers are secured via relationships with online auction platforms which enable auction participants to ‘bid now, pay layer’ or to receive sale advance loans. Unbolted will lend up to 70% of the hammer price for ‘bid now, pay later’ loans, or up to 40-50% of the auction reserve for sale advance loans.
- Target interest rates – Interest rates are quoted monthly at between 0.5 – 0.8% (depending on the type of loan), which when annualised and compounded equals 6.0 – 10.0%.
- Provision fund – Unbolted does advertise the existence of a provision fund, though no statistics regarding its size or terms are provided to investors. Separately, for loans secured against gold or silver, the platform takes out insurance protecting investors against falls in the value of the metals.
- Self-select vs. auto-investment – Both self-select and automatic investment options are available via Unbolted.
- Secondary market / ability to resell – No, Unbolted does not currently operate a secondary market. This means that you are committed to a loan once an investment is made. The typical loan terms are relatively short (six months is typical) and so provided no issues are experienced, your funds are not locked in for a significant period of time.
- IFISA – Yes, Unbolted offers the ability to invest via an IFISA.
- Minimum investment – You can invest in Unbolted from just £5.
- Cashback offer – There is no current cashback offer in operation.
Buy2Let Cars (launched 2012)
Buy2Let Cars enables investors to purchase a car which is then leased out by its sister company. It is a hands-off investment with the platform dealing with finding end users. If the end users fails to make repayments, Buy2LetCars will seek an alternative lessee or will make attempts to sell the car. In the event that the proceeds are lower than your initial investment amount, the company commits to covering repayments up to 85% of the initial loan amount (provided it is financially able).
- Target interest rates – Between 7.0 and 11.0% (tiered based on the value of your investment).
- Provision fund – No provision fund exists, though the company commits to repaying up to 85.0% of the initial loan amount if the borrower falls into arrears resulting in a capital loss for investors (subject to the company being financially able).
- Self-select vs. auto-investment – The investor has no choice in the car purchased via the platform.
- Secondary market / ability to resell – No secondary market exists, which means you will be unable to exit your investment prior to the end of the three year investment term.
- IFISA – No IFISA is available.
- Minimum investment – You must invest a minimum of £7,000 in Buy2Let Cars, making it unsuitable for smaller investors.
- Cashback offer – There is no current cashback offer for Buy2LetCars.