The Rise of Peer to Peer Lending

Peer-To-Peer lending is fast becoming big business. If you’re switched on to the financial news, you may be wondering why it has taken so long to catch on. Zopa launched all the way back in 2005.

For the majority of us, it is a new concept and one that is worth knowing about.

 

What is Peer-to-Peer?

Peer-to-Peer is a method of lending and borrowing money without the involvement of the middleman of a bank. Whilst the system still requires a middleman of sorts, normally a website, the terms of the lending agreement are between the investor and the borrower.

When you keep your savings in a bank they offer you a set rate of return, or interest, on your savings. They then take this money and offer it out to other consumers, charging them a higher rate of interest. This is the primary way in which banks make their profits. Their profit is the difference between the two interest rates.

In order to maximise their profits, it is in the bank’s interest to keep the interest that they pay to their investors (customers) as low as possible and to keep the interest rate they charge for providing a loan as high possible.

When you invest through a Peer-to-Peer website there is no middleman in these agreements. The interest rate is agreed between the investor and the borrower. Of course, this is affected by market forces. If you’re offering to lend your money out at 50% interest and everyone else is offering their’s at 40%, no one will take you up on the offer.

Of course, every company needs to make a profit and Peer-to-Peer brokers are no different but, in general, they take a predefined percentage of your profits and not only is this made clear on investment but compared to traditional banking, their cut is incredibly low.

Why now?

The rise of the Peer-to-Peer format was perhaps an inevitable effect of the advancement of technology. We’ve seen the concept of peer-to-peer gain traction in almost every industry. Well known examples that you may have heard of include AirBnB and Uber.

The more and more connected our world becomes, the easier it is to connect people directly and this is disrupting many traditional industries. It will be very interesting over the next few years as these upstart Peer-to-Peer models become the establishment standard and then begin the push for profits that every corporation eventually undertakes. Will they be true to their model?

There has been another enormous factor in the prevalence of Peer-to-Peer lenders and that was the financial crisis, credit crunch, call it what you will.

Interest rates plummeted and those with the money to start saving saw the returns offered by the high street banks disappear to almost nothing. So people did what they always do, started searching for the better option.

So why Peer-to-Peer? The difference is enormous.

I bank with a high street building society. If I wanted to use my bank for savings, the most generous account on offer at the moment would offer me 1.25% annual return.

A quick glance at Ratesetter‘s front page offers me up to 6.2% interest, Funding Circle is offering me an estimated return of 7.3%.

If you’ve got the money to put away it’s a no-brainer.

 

Where can I get involved?

There are a multitude of sites available for you to investigate and each offers different advantages and disadvantages.

The current main players are:

Zopa

RateSetter

Funding Circle

But there are many others out there now so don’t be afraid of doing your own research.

No idea how to decide? I’ll give you a few pointers on what to look out for.

• The Rate of Return – Don’t just go by the big number on the front page. Dig deeper and see what the actual current rates are
• The Charges – Each of these companies makes money. Find out how much you’ll be paying them.
• The Risk – Some of them offer contingency funds to cover bad debts, but not all of them.
• Access to Money – You can’t always freely access your investment money in these schemes, although they do often offer a secondary market to sell your stake if you want out quickly.

It’s also worth bearing in mind that the Peer-to-Peer industry is now regulated, offering you greater security. New regulation is coming in all the time, have a quick read up on the latest developments before diving in.

As you can begin investing from as little as £10 this is a great way to start saving and start controlling your investments. I highly recommend it.

 

 

 

 

Saving on a Low Income

Savings are the cornerstone of financial security at any level. We all know that it’s something we should be doing, so why do so few people manage it?

When you’re living paycheque to paycheque, as many people are in the current economic climate, it becomes a daunting task to set aside any money for the future. The primary concern is to meet the rent and bills now rather than worry about hypothetical costs further down the line and this perfectly natural. This doesn’t mean that it’s impossible to start saving, just that it requires discipline.

So what are the key points to start saving for the future?

Firstly, start small. If you don’t think that you can afford anything then start very small.

Put away £1 a week if necessary, 10 pence, whatever you can afford. Make sure that you do this regularly, have a set time every week so that you don’t forget. In fact, the easiest way to do this is to set up a regular transfer from your account to a savings account. If you set the transfer to go through on the same day as your payday then the money will go straight out to your savings, it won’t be in your account long enough for you to notice that it’s gone!

Secondly, start today. Don’t plan to start next week, next month or next year, start now. Every day that goes by your savings will increase, every day that you don’t is a missed opportunity.

Another crucial point is very simple. Don’t touch the savings! Towards the end of the month you may be tempted to take money out of your savings to see you through until payday, often with the intention of paying the extra back in. Don’t. You’ll have to pay a little more in to your savings just to get back to where you were, so you’ll be more likely to do the same the next month, and the next month. It’s an easy cycle to get into and a difficult one to get out of so avoid this trap in the first place.

However, you do need to establish what your savings are for. Are you saving for retirement, a new car or just to have some emergency money? What establishes an emergency? Set yourself boundaries and stick to them!

I’ve found it helpful to have to separate savings accounts, one for long-term, one for an emergency fund. The long-term savings I do not touch under any circumstances, that will eventually be a deposit on a house, or even a retirement fund. The emergency fund is different, this covers expenses that aren’t covered in my monthly budget, but only emergency expenses.

For example, if the MOT is due on my car, then this is budgeted for and paid for out of my regular account. However, if my car breaks down and costs £200 to get back on the road, then this is an emergency payment from my savings. I need the car working and cannot afford to take that hit to my monthly budget.

Using the same example, it shows how important savings are. If I didn’t have that backup in place then that would have to come out of my monthly budget and leave me short on everything else for a month. This could leave me with no money for petrol, food or even rent. Having that backup, however small it is, can make the world of difference when the situation gets difficult.

A lot of keeping control of finances is about forming the right behavioural habits and this is no exception. You’ll feel the difference in your budget initially, but after a few months it’s unnoticeable. You grow accustomed to living off slightly less money, meanwhile your savings can just grow and grow.

Budgeting Basics

The budget is the basis for any form of financial stability, from household to business to country.

So what is a budget and how will it help?

It’s not a magic fix to money problems, quite the reverse, it is a tool to help you see where the problems are. If you’re overspending then a budget will help you see where your problems are, but it won’t fix them. That’ll be down to you to spend less. There’s no other way to do it.

But it can make a big difference in telling you where your money is going. That £2 a day on a coffee, £3 on a sandwich and £8 on a pack of cigarettes? That comes to £4745 per year. Surprised? That’s where the budget will help you.

How do you set up a budget?

There are two routes to go down, you can either build your own budget or use a template. I would always recommend building your own budget, it’s tailored to exactly what you want see and is as simple as you make it. The problem with templates is that they can be incredibly hard to customise and get the information that would be useful to you.

That being said, there are good budget templates available on programmes like Microsoft Excel, there are great apps available for all phones and plenty of websites that will let you budget online for free. If you’d rather stick with something pre-made then this is the route to go down. Make sure you check out some reviews before committing to a format. You don’t want to waste time setting up your finances in an app that you stop using after a week!

From here I will focus on the very basic steps to create your first budget.

Step 1

The most basic version of a budget is simply a list of your expenses. Make a note of everything you spend, from the pack of chewing gum you bought when walking through town to the new car you’ve waited years for. Write it down. This will start the habit of noticing what you spend. How many times do you spend that 50 pence on chewing gum? How long did you save for the car? The simple act of recording this will start you being more conscious about your expenses.

If you find yourself forgetting then follow this one simple step.

Keep. Your. Receipts.

If you’re ever asked if you want a receipt, the answer is yes. You don’t throw that receipt away until you’ve recorded the expense. With pockets bulging with receipts, or a pile building up on the desk you will soon remember to keep records.

Step 2

Once you’ve got in the habit of recording all your expenditure it’s time to dig into that raw data a bit more. Divide your expenses into categories, just broad ones to start with as you can worry about subcategories later. A simple division would look something like this.

• Food
• Travel
• Bills
• Rent
• Miscellaneous

Start recording each receipt into a different category. This is the time that using a spreadsheet becomes a lot easier than a paper copy but if you’re not familiar with the software then stick to paper!

Over the course of a month, this will allow you to see how much you’re spending on each category.

Step 3

Now is the point that we get a bit more complicated. It’s time to set your budgets for each category.

Some of the categories, such as rent or bills, will be for a fixed amount so these can’t be set. So take your whole monthly income and take away these fixed costs. The remainder is what you have left to allocate. Let’s have an example using the categories above.

Alan earns £1000 per month.

He pays £500 in rent and £200 in bills.

As these are both set costs you need to take these off the £1000 before splitting the budget.

This will leave Alan with £300 per month to split between the final categories of Food, Travel and Miscellaneous.

How you do this split is entirely down to your circumstances but make sure you give yourself an exact figure to aim for!

Step 4

Sticking to your budget is the hardest part. Once you’ve spent your allocation for the month you have to stop spending money in that category, although for obvious reasons this isn’t always possible. If you’ve no money in your budget for food and still a week to go before the end of the month then you can’t starve. But when you buy food, make sure that the extra comes out of the allowance for another category.

These imbalances will happen frequently to start with as you learn which things cost you the most. Take a look back at where you’ve overspent and underspent at the end of the month and adjust your budgets accordingly. Prioritise the things that are the most important, food being a primary example, but don’t go overboard. If you can buy food on a lower budget by shopping more sensibly then maybe that extra money could go towards something more fun?

As you get used to budgeting you’ll get better at it in several ways. After a while you’ll know roughly how to split the budget into categories and which ones need more money in but you’ll also get a feel for what you can afford within your budget. You’ll automatically check yourself when shopping, to ask whether this means you’ll overspend and once you have set targets it is much easier to motivate yourself to meet them.

The important thing to remember is that budgeting is a habit. It takes time to form the right behaviour patterns but when you start following the process automatically the difference can be fantastic.

Budgeting gives you control over your finances and gives you the ability to make informed decisions about what to spend your money on and when you can afford it. Some of you will be content to keep this to a monthly level, being assured that you can meet your bill payments. Some of you will end up with a much more complicated budget breaking down your expenditure into weekly and even daily intervals, matching your costs down to a penny. Either way, it can give you more comfort and peace of mind when managing your finances.