The Bank of England Governor Mark Carney has, on numerous occasions, confirmed that the era of long-term low interest rates is coming to an end with interest rates expected to rise starting in Q1 2016 and peaking at around 2.5%, over the next 3 years. Although this is a fivefold increase from our current levels, it gets us nowhere close to the pre-crisis and most recent average BBR, which from 1975 – 2008 was an average of 8.6%.
Base rate rises haven been cited as being a crucial turning point for the Peer-to-Peer Lending industry. Would investors revert to the safety and certainty of traditional banking and savings accounts, leaving P2P Lending platforms struggling to fund loans? We think in the early days of P2P Lending this could have been the case, but the sector has matured and deepened across the multiple P2P Lending models, which include Consumer, SME and Property.
Today’s Investors, unlike the early adopters, are not only lending in order to earn superior returns. They like being in control of their financial destiny, they like the transparency, they like the customer service and they like the fact that there are other options aside from Banks. Banks cannot win back their customers on rising interest rates alone.
Rate rises may hit different parts of the P2P Lending market differently, lower yielding platforms may be hit hardest as investors are offered similar returns from traditional bank savings accounts, whilst higher yielding secured loan platforms will still be able to offer investors a superior risk adjusted return. Investors also need to factor in the effect of interest rate rises on the level of borrower defaults, and whether consumer, SME or property loans will be hit the worst.
Investors will ultimately have the last say, as it is them who will decide ‘how much is my money worth’. How much do they want to earn and how much risk are they willing to take in order to earn that return.
Interest rate rises are coming, so we say let’s embrace them and prove to the naysayers that P2P Lending is a long term financial solution for both borrowers and investors.