Ok, so you want an unsecured loan but you have a little bit of iffy bad credit on your credit file. Nothing major like CCJ's or defaults but you have got a few late payments on your mobile telephone bill and a personal loan but importantly, you made the payments up within the month in question so they are not officially in arrears. Just a little bit late. So that's ok isn't it?
Well no actually it isn't. Sound familliar?
Of course it does because this situation is typical of what millions of British people face every year. A few blips on their credit profile and suddenly no-one (within the banking and financial sector certainly) wants to know them anymore and even a master loan broker like Black and White Loans will not be able to help you. Now as former lending executives ourselves who were heavily involved in the subprime mortgage sector before it went bump, we know that this situation is not new but more importantly, what has happened since is worse still. Then, lenders who would lend to people with very poor credit profiles pulled out of the market completely and the result was that all remaining loan providers, mortgage lenders and other financial institutions got scared and went so far the other way, that even a person with just one late payment on a catalogue or mail order account was considered a risk.
Which leads us to where we are now and the sheer lack of lending products for people with an imperfect credit history. Effectively, they have a choice of one product; a guarantor loan. This product apart (and if you discount payday loans which are capped at 1,000 and must be paid back within 30 days) there is nothing at all available to an individual who doesn't own their own home. Not a single product anywhere in the Uk. However there may be a (small) glimmer of hope on the horizon: The growth in peer to peer lending.
Peer to peer lending is a relatively new concept which appeared on the web a few years ago but has now gathered pace (and more importantly - outside funding) and is in danger of becoming mainstream with the likes of Zopa bringing credibilty to a previously unknown sector. Effectively it works like this: Investors who are looking for a better return on the savings will invest small tranches of cash in Zopa. This will only be done once the investor has decided upon the level of risk they are willing to take and at what rate and for how long they are prepared to lend their money out. The investor and the borrower never speak or even know who each other is so it is all completely confidential.
The reason this works is because the level of risk for the investor is minimal because their money is usually added to a 'pot' and their share of that pot may only be £500 or £600. However the upside for the investor is that they will get a much higher rate of interest compared to what they would receive in a bank or even a building society. So what does this mean for the future of personal finance? Well firstly it puts banks in a very difficult position because if this takes off (and Zopa has been trading for 8 years and is growing year on year) then there will simply be no need for banks within the personal or consumer finance sector. There is no question that if things remain as they are, peer to peer lending will gather more pace in 2012 and beyond.
And it doesn't stop there. Organisations like Ratesetter and Funding Circle do almost exactly the same thing for businesses looking for loans or finance and again, both are extremely successful and are showing growth year on year. They also came about because of the banks reluctance to lend to small businesses and their popularity and almost instant success shows that there is a real need for new and innovative lending products.
The only fly in the lending ointment is that so far (although it is hard to tell from just looking at their websites - and they do not publish the average credit profile of their client base) they do not appear to cater for those clients with slight credit problems (and we are not talking about 'heavy' adverse like bankrupts and those in an IVA or debt management plan) and that is where the biggest problem lies because after all, if someone has a good credit histroy they could just go to their bank.
So in summary, peer to peer lending shows enormous promise but until they can appeal to a wider demographic the way guarantor loans do, they will struggle to make an impact in the niche unsecured lending sector.