Should we be worried about the growth in peer-to-peer lending?

Former UK financial regulator Adair Turner certainly thinks so.

Speaking to the BBC, Lord Turner, former chair of the Financial Services Authority, warned of the dangers of peer-to-peer lending.

“The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses,” he forecast.

What is peer-to-peer lending?

Peer-to-peer (P2P) lending has grown rapidly in both the UK and other markets, alongside other emerging 'fintech' services. The industry has flourished in the gap left by banks cutting back on credit in the wake of the financial crisis.

P2P lending works by connecting savers and borrowers directly and opens up access to funds for borrowers who might otherwise not get it and much higher rates of interest for investors.

Typically, invested funds are spread across hundreds of borrowers, providing credit for anything from car loans to home improvements.

Is it safe?

The industry is only now in the process of being regulated. With huge sums of money involved – by 2025 the global value is forecast to hit $1 trillion – concerns are certainly justified.

However, P2P lenders argue that the system reduces risk because lending is spread across many borrowers. While it is possible you might not get your money back from a single borrower, the chances of hundreds failing are much lower.

However, the system is yet to be tested through a downturn or recession. With so many borrowers with similar credit profiles, the chances of them all falling over at the same time during a future downturn are increased.

Schemes are being put in place to cover potential losses, but the true test, and an answer to the question of whether P2P lending is safe, will arguably only come with the next major recession

Have you read?

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