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Following Quakle Bust, Fears Regarding Peer To Peer Lending Increase

by Jim ONeil on December 15, 2011

in peer to peer lending

The online peer-to-peer lending company Quakle recently collapsed, leading UK residents to wonder how safe their money is with these money exchange programs. Savers are drawn to arrangements like these due to the higher rates of return.

During the past 18 months, they have moved £192 million from their bank accounts to these sites. However, they may now be willing to accept the lower rates offered by building societies and banks solely due to the additional protection offered to their investment.

With peer-to-peer lending, investors lend money to others at an interest rate that they determine. Some lenders charge as much as 25 percent interest to those needing cash and unable to get it elsewhere. The borrower repays the loan and interest over a predetermined period. Major players in the UK peer-to-peer lending industry include Funding Circle, Zopa, Yes-Secure, and RateSetter.

Zopa is the largest peer-to-peer lender, handling £165 million with over 500,000 customers. Despite being established only last year, RateSetter already has 70,000 customers and has handled £11.7 million, with an average loan of £3,700.

Despite these growth trends, Quakle is one indicator that not all may be positive. Last week, the company emailed customers regarding its closure and warned borrowers of the potential consequences.

Funding Circle founder James Meekings assured the public that peer-to-peer lending remains a stable financing option. He said that though the small player Quakle did not make it, the industry will remain an attractive choice for savers seeking an alternative to the low interest rates offered on High Street.

Despite these reassurances, consumers should realize that peer-to-peer lending does carry some risks. These drawbacks affect both savers and borrowers.

There is always the chance that a borrower will default on the loan. This is particularly a concern in this shaky economy. Business failure, as in the case of Quakle, is the other risk. This industry is unregulated, so the Financial Services Compensation Scheme does not cover savings. Deposits up to £85,000 are protected with organizations covered by this scheme.

Concerns regarding this lack of regulation and protection have led UK peer-to-peer lenders to take steps. They have formed a voluntary trade association and are currently in discussion with Treasury officials regarding potential regulation.

The collapse of Quakle threatens efforts made by Zopa, RateSetter, and Funding Circle, the three largest players in the industry. Some fear that consumers will look to payday loans as a replacement source of funding. Payday lending offers fast cash to people who need small sums of money.

However, the interest rate is so high that many people sink themselves into debt by using these loans. Many borrow for the wrong reasons, others borrow too much, and some are sucked into a cycle of borrowing.

Insiders report they were concerned about Quakle since its November 2010 inception. The business model used by the company did not attract savers because it failed to establish trust. Saving rates were a sky-high 25 percent but Quakle based its decisions on borrower social media rankings and profiles, not caution.

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