1.5 New Types of Financial Services Provision Flashcards
Peer-to-peer lenders definition
Online marketplaces that put borrowers in touch directly with lenders, bypassing the banking system
How does peer-to-peer lending work?
Borrowers enter into legally binding contracts with those who lend to them and both sides are charged a fee by the P2P firm
What is the incentive of P2P lending?
Borrowers pay at a lower rate of interest and savers earn a higher rate than those offered by traditional banks
Does the FSCS protect depositors in P2P lending?
No, but it is regulated by the FCA
How is risk reduced in P2P lending?
Strict credit scoring and diversification (the money provided by a saver is split up into small amounts and lent to a large number of borrowers)
Examples of P2P lenders:
- Zopa
- Funding circle
What does Zopa specialise in?
Lending to personal customers
What does Funding Circle specialise in?
Business loans
What do P2P lenders need to do to be successful?
Persuade savers that their money is safe and that borrowers will be able to access the loans they need
Payday loan companies defintion
Online firms that provide instant, short-term unsecured cash advances
What are the requirements to be eligible for a payday loan?
- Must be in employment
- Must have payroll records
Why has the payday loan sector grown rapidly following the credit crunch?
It is the only source of funding for some
Why have payday loan companies received bad publicity?
- Many customers roll their loans over when they cannot repay on time leading to debts mounting up
- Taking out a payday loan adversely affects a person’s credit score and remains on the credit record for 6 years
- Aggressive tactics to make borrowers pay back
Why does taking out a payday loan adversely affect a person’s credit score?
Credit scoring agencies assume that only someone who is not creditworthy and who therefore cannot obtain a loan would take out a payday loan
What changes did FCA introduce after review of payday loans sector?
- Fixed default fee capped at £15
- Initial cost cap of 0.8% per day
- Total cost cap of 100%
