The business case for guarantor peer-to-peer investing

The peer to peer lending market for investors in the UK is booming. The amount lent in 2016 rose to an all-time high of £6.5 billion and will continue to grow in 2017.

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Those with disposable income are attracted by earning returns on their investments which are significantly higher amount than the current accounts and ISAs offered by their local banks.

The “peer to peer” model is based on placing your money with a lender like Zopa,ThinCats or Ratesetter and having this lent out to another borrower looking for a personal or business loan. How much you can earn as an investor is based on your risk appetite.

The loans offered are often unsecured, meaning there is no security other than the customer’s eligibility, based on their credit history, income and affordability. But there is always a risk of a defaulted loan and the initial investor losing out or not getting the exact rate that they were initially quoted.

Is Guarantor Lending Better For Investing?

With unsecured finance potentially having a higher default rate, there is a business case for lending against guarantor loans to secure a higher interest rate.

With guarantor lending, you have the main borrower who is trying to prove their creditworthiness but also a guarantor with a strong credit profile and usually a homeowner status to back them up. In effect, this makes the default rate very low (less than 5 per cent) and a very safe type of borrowing and lending.

Coupled with the fact that the Representative APR for guarantor loans is around 49.9 per cent, compared to unsecured loans at around 15.8 per cent - there is a bigger margin for lenders and investors.

It appears that the market for investing in guarantor products is unsaturated – with very few facilitators of peer to peer guarantor investing products. This includes Cheshire-based eMoneyUnion offering rates as high as 10 per cent and only if the customer does not qualify for a p2p product first. Elsewhere, Guarantor My Loan have moved out of the traditional guarantor lending to incorporate a peer to peer product, offering investors rates of 8 per cent to 10 per cent.

Why are there not more P2P lenders offering guarantor products?

From the lender’s point of view, the application process is certainly longer. Given that they have to underwrite two people for a loan (borrower and guarantor), it makes the average loan process a week compared to a day or two with an unsecured loan product. There is the argument that peer to peer lenders also have to worry about investors, adding another layer of complication into the mix.

However, since the default rate is potentially lower and the interest rates are higher, there is a strong case for combining guarantor lending and peer to peer lending in the future.

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