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A new peer-to-peer lending business is currently providing huge returns. Should you get in on the act?

It seems many of you have finally had enough of the banks with their sky-high rates on loans, but appalling returns on savings. Online peer-to-peer lending is really starting to take off. These businesses bring together people who are looking for a better return on money they have available to lend, with people who want to borrow. It’s a clever way of cutting the banks out of the loop altogether.

First to launch was Zopa back in March 2005. More recently Funding Circle entered the fray based on similar principles, but instead of enabling investors to lend to individuals, they have an opportunity to lend to small businesses. And this month saw the launch of Quakle which, like Zopa, provides a virtual marketplace for connecting private lenders and borrowers.

But how is Quakle different?

Quakle differs from the others by combining peer-to-peer lending with social networking, allowing lenders and borrowers to build relationships. Of course, potential borrowers are thoroughly credit checked first (more on that in a moment) but they are also given a ‘reputation score’. This score represents their behaviour on the site, and gives an indication of how reliable they are as a borrower. The scoring system is designed to encourage people to be financially responsible.

In fact, borrowers and lenders are encouraged to get to know each other and join groups to form a social community. In this way, a lender can get a better idea of where their money is going.

An individual’s own reputation score will also be affected by the financial behaviour of the members in the same groups. Quakle say the community encourages people who are good with money to stick together and support each other.

How does Quakle work?

Borrowers place online loan requests which are open for a period of 10 days. They can ask to borrow any amount between £1,000 and £21,000, and must set an interest rate between 1% and 25% which they wish to repay the loan at.

During this 10-day ‘auction’ period, lenders propose to lend a proportion of the loan - a minimum of at least £30 - at the interest rate they are willing to accept as a return on their investment. When the system finds a match, the borrower and lender will be entered into a legally binding contract. Loans must be repaid to the lender over a period of 12 to 36 months.

It is recommended that lenders divide their investments between as many borrowers as possible to reduce the risk of default.

How much does Quakle cost to use?

If you want to lend through Quakle it won’t cost you a penny. You can also withdraw the repayments that come back from borrowers from your Quakle account without charge. What’s more, as an introductory offer, all lenders that register on the site will get a £30 bonus.

Borrowers, on the other hand, will be charged a fee of 1.5% of the loan amount - so that’s £15 per £1,000 borrowed. If the borrower’s details have to be passed over to a debt collection agency, a fee of £10 will be charged.

Is Quakle safe?

Quakle is the only peer-to-peer lending site to be regulated by the industry watchdog, the Financial Services Authority (FSA) as a small payments institution. Anyone who becomes a member of the site will have their identity verified, and will be credit checked by credit reference agency, Experian. Quakle will also check for any history of insolvency or county court judgements (CCJs).

These checks will enable borrowers to be awarded a credit grade from A to D which indicates their creditworthiness. Lending to borrowers with an A credit grade involves the lowest risk. The site is still very new, but the anticipated default rates are shown below for borrowers in each credit grade:

Default rates

As you can see less than 1% of borrowers with A and B credit grades are expected to default, and less than 3% of borrowers with C and D credit grades. You should give the default rates serious consideration before agreeing to lend any money. The probability of default is low but it is still, nevertheless, a risk.

If a borrower you are lending to misses a repayment, Quakle will chase them up on your behalf and keep you updated with progress. After a period of 21 days, if the situation remains unresolved, it will be passed over to a debt collection agency.

How much can lenders expect to earn?

Right now Quakle say lenders are earning a return of up to 20%. That said, this is quite high simply because of supply and demand. There are currently more borrowers than lenders in the community which is pushing rates up. What’s more, most borrowers on the site at the moment have a credit grade of C which is also stepping the return up for lenders.

The table below shows the anticipated rates offered to borrowers in each credit grade, and therefore the expected return for lenders:

Rates offered to borrowers

As you can see, lenders could get healthy returns on their investment no matter which type of borrower they choose to lend to. However, remember that the site has only just launched. As more members join, the average rates of return are likely to alter.

How does Quakle compare with Zopa?

Quakle and Zopa share a lot of similarities. Zopa say lenders have earned an average rate of 8.1% over the last 12 months (after fees but before bad debt). This is broadly in line with the returns lenders can expect to receive from a credit grade A borrower via Quakle.

Quakle believe that because you are taking on the risk as a lender, it’s unfair to charge you a fee as well. However, lenders via Zopa will pay 1% of the amount they lend out, reducing the overall return achieved.

If you would like the potential to earn better returns on your cash, why not try lending a small amount on each site in the first instance to borrowers with the highest credit ratings. Once you’ve had a practice run, you can decide which one you prefer.

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