Monday, 13 April 2015

Why a rise in the bank of England base rate would be good for peer lenders like me

The Bank of England base rate has been frozen at 0.5% since March 2009 and is likely to rise by the end of 2016. Experts have predicted that it may go to 1.5 or 2.5%. This is not good news for those with large mortgages or those with other debt; take heed and start overpaying your mortgage now. However a rise in the bank of England base rate would be good for peer to peer lenders like myself and it is easy to see how.

Peer to peer lending sites like Zopa and RateSetter will benefit investors if the Bank of England base rate increases. These sites do so well because they give borrowers the opportunity to borrow money from investors, i.e. lenders like you and I who offer them money at a lower interest rate than they would get from the bank. They can get money for a car loan from us from Zopa, RateSetter or other peer lending sites for three years charged at around 4% interest, provided they have good credit. A car garage can charge over 6% for the same loan, perhaps even more.

Lenders will be the winners and borrowers the losers with increased Bank of England base rates. Here is my theory how and it all comes down to supply and demand:- There will be a decreased supply of cash available for borrowers- lenders may not have as much spare cash to lend due to their own increased expenses from mortgages. There will be an increased demand for cash as car loans and other personal loans will cost more through banks than they do currently.

Decreased supply of cash, increased demand for cash = higher interest rates

Basically more people wanting money and less money available means higher interest rates for borrowers and this is fabulous news for investors. Those 3 year Zopa loans could bring in 6% or more for lenders as opposed to 4%. It is also important to remember that higher interest rates may also result in more people defaulting loan payments but that is another post altogether.

Will an increase in the bank of England base rate encourage people to play it safe with savings accounts or try and take advantage of higher interest rates with the likes of Zopa and Ratesetter? Personally I will do a little bit of both but I predict that many people will be pleased to get a few percent interest on their savings accounts again and fail to take opportunity of the better gains to be made from peer lending sites.

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