Friday, January 06, 2012

Another take on peer to peer lending

It seems a little strange to me that at a time when banks are meant to be desperately trying to increase their balance sheets, they are offering such meagre interest rates. I dunnow but maybe offer some decent rates and people will shove their money in your bank? But it seems they have decided it’s better to offer crap rates and hope we are too stupid to realise we can get better returns elsewhere.

So for a few years I’ve been stashing cash in Zopa and getting a return that manages to beat inflation by lending money directly to people, with the caveat that there is a higher level of risk than having money in the bank.

But I’m obviously not the only person to choose this option and rates have been falling of late. And although I’m happy to finance personal loans, i did have a hankering to lend money to businesses, especially since this seems to be something else banks are failing to do properly*

Which is where Funding Circle comes in. This is peer to peer lending but the other party is a business. Interest rates are currently some what better than Zopa. Time will tell how bad the default rates are but I’m going to drip feed some money in there and see how it pans out.

*I always thought banking was pretty straightforward, take in money from deposits, then lend it out to other people and skim a bit of profit from the transaction. Simple and a bit boring. Maybe they should have stuck to this slightly dull job, rather than inventing, buying and selling insane derivatives that nobody understands and nobody can quantify the associated risk. Get back to doing what you’re meant to do and people might get off your back a bit…

2 comments:

Anonymous said...

You are missing one important aspect of banking: they are allowed to lend the same money over and over again. You and I cant do that, it would be a fraud. When lending you 10000€ the bank actually increases the money volume by 10000€, since the money didn't exist before. That is esily done when money is no longer based on coins or pieces of paper. By stopping new loans the money volume decreases since we must pay back the same amount. Plus the d*mn interest. Where does it come from? We cant make our own money, so it must come from loans. Run faster so you can pay your bills. It is called "growth".

Chris Bell said...

Indeed, which makes the pathetic interest rates on offer from banks look even worse, since they can lend my money out at least ten times!

But I am in something of a moral dilemma. Clearly there's too much debt around at the moment, with it being used primarily to inflate asset bubbles, so should I be involved in lending money myself? I like to think that Funding Circle is being used to help productive businesses rather than more Ponzi schemes...