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What Exactly Is P2P Lending And Has It Lost Its Way?

May people say that P2P lending websites hve lost their way; they're not P2P any more. And when I say “many people say”, unlike Donald Trump, I don't mean me. I mean a lot of financial journalists and individual lenders are saying it.

I've heard them say that RateSetter isn't P2P because you can't choose loans. Zopa isn't P2P because it wants to set up a high-street bank. Lending Works isn't P2P because it has a reserve fund. Funding Circle isn't P2P because it has been known to lend some of its own money. Proplend isn't P2P because you can't set interest rates yourself. Landbay isn't P2P because it doesn't have a “proper” marketplace. Etc etc.

I don't know who it is they have talked to that they think has the authority to say what P2P “is supposed to be”. It's whatever each individual business decides. None of them can go round saying to other businesses they're doing it wrong. They're just doing it their way – and a lot of very interesting, varied and often highly profitable investment opportunities have arisen as a result for those of us who focus on the risks and rewards, and not on what P2P is “supposed to be”.

So, personally, I don't care what you call any of it provided each unique lending site fulfils four criteria:

1) Explains itself clearly.
2) The risks are transparent.
3) The level of risk of losing money stays, on average, in its sweet spot that is lower than the stock market, but higher than savings accounts (and cash ISAs).
4) The level of risk of losing to inflation stays, on average, considerably lower than savings.

What does 4thWay call “P2P lending”?

As a ratings and research agency, we keep it simple. To us here, a lending website is P2P provided it is legally an agent facilitating loans between lenders and borrowers.

More specifically, if the P2P lending site itself goes bust while itself owing millions to, say, Barclays Bank, then Barclays can't say that it has a claim on the loans that are outstanding and due to you and me – us individual lenders.

If in that situation, the individual lenders are owed precisely £1 million from individual borrowers, and if the P2P lending site has no money to pay Barclays, Barclays gets nothing. And the individual borrowers keep repaying us individual lenders.

Our loans are therefore protected from Barclays' grubby hands because the P2P site was just a third-party agent. As the repayments come in from our borrowers, those payments are still owed fully to us, minus a fee to the administrator who is appointed to wind down the P2P site's existing loan book.

The alternative would be the lending website lending to the individual borrowers itself, and individual lenders like us lending to the lending website. It's when the only borrower we're lending to is the lending site – that's when Barclays could muscle in.

And to us that's not P2P. That's P-to-lending-site-to-P.

For those of you (and I know you're out there even if I don't know your names) who consider having a “real” marketplace the sign of true P2P, or who just enjoy looking for individual deals, I've got good news for you. We've updated our article on P2P lending websites where you can trade on marketplaces (called secondary markets). You can read it here: Where Can You Buy Or Sell Existing Loans?

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