How Will P2P Lenders Respond to Increasing Interest Rates?
In the past few weeks there have been rumblings that the Bank of England is planning to raise interest rates in response to economic stimuli. While the Bank hasn’t officially declared its intention there are very good reasons to believe that the next meeting of the Monetary Policy Committee will result in a new, higher interest rate, designed to help combat rising inflation.
Higher interest rates are used to make saving more attractive and borrowing less so. In recent years we’ve seen peer-to-peer lending become highly attractive to savers precisely because it offers a much better rate of return than that available from banks, whose interest rates are generally rock-bottom. However, if interest rates rise, saving with banks again could become more attractive to savers, who may turn away from peer-to-peer lending.
How much will rates rise by?
The impact of a rise in rates very much depends on how much it increases by. The Bank of England hasn’t signalled how much it intends to raise rates by but it seems unlikely that we’ll see a huge shift, certainly nothing like an increase to the pre-crisis levels of 5% or more. In all likelihood rates will probably remain under 1% – the inflation this rate change is intended to combat stems from “frothy” speculation rather than widespread spending, so a large rates hike is unlikely.
What impact will a rates rise have on the P2P lending sector?
Peer-to-peer lending platforms aren’t directly affected by the changes in the Bank of England’s base rate, because they don’t borrow money from it. However, these platforms must remain competitive in the market and must offer both investors and borrowers an attractive product, so they will need to respond to changes in the rates offered by high street banks.
How will the P2P industry react?
A rise in rates makes borrowing from banks more expensive and saving in banks more rewarding. Peer-to-peer platforms usually mirror this effect in order to remain competitive. However, it’s not unthinkable that P2P platforms will be able to capitalise on their strong market position if interest rates don’t change drastically, initiating a “sea change” in the consumer credit market. Platforms like Zopa have seen an enormous amount of interest in their lending products in the past few years and have had to close their doors to new lenders to avoid an oversupply of loans to the market.
One potential course of action could be for the platform to continue offering cheap loans to borrowers instead of increasing the price in line with high street banks. They wouldn’t be able to raise the returns they offer investors, but their products might still be more attractive to savers than the high street alternative. By providing cheaper loans than the high street peer-to-peer borrowing would become even more popular, and would increase the P2P sector’s share of the consumer credit market.
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