Why are P2P platforms raising their rates?

The investor returns being offered by peer-to-peer lending platforms have risen across the board this year, with target rates now edging above eight per cent in many cases.

Yesterday, JustUs became the latest P2P lender to raise its investor returns, from an average of eight per cent per year, to 8.5 per cent. Days earlier, Kuflink increased its target rates to 9.73 per cent per annum, up from its previous target of 8.05 per cent.

Last week, Crowdproperty raised its rates from between 6.2 per cent and 7.8 per cent per year, to between 7.5 per cent and 8.5 per cent per year.

And in December, Easymoney announced a 0.5 per cent increase across all three of its investment products, with target returns now ranging from 4.53 per cent to 6.51 per cent.

All of these platforms also offer the opportunity to invest funds within an Innovative Finance ISA (IFISA) which protects their returns from taxation.

It would be easy to assume that these recent P2P rate rises are purely in response to the climbing base rate, but there is more to it than that.

Unlike banks, P2P lending platforms do not peg their borrower rates to the base rate. As alternative lenders, they have more freedom to set their own rates based on market averages, investor demand and the risk profile of the borrower. These are the key factors that are taken into consideration before any changes are made to P2P rates.

Meeting investor demand has become increasingly important in recent months, as the higher rate of inflation has made most fixed-rate savings and investment options represent poor value.

Read more: P2P most popular among mid-income investors

Furthermore, the departure of Assetz Capital and ArchOver from the retail P2P lending market has left many P2P investing veterans in search of a new home for their money. With ISA season approaching, this is a good time for platforms to make themselves more attractive to new or migrating investors by making their target returns as competitive as possible.

P2P platforms also have the flexibility to decide how much of a cut they will take out of each transaction.

P2P lenders make their money by charging borrower fees, and/or by taking a percentage of any interest earned. At a base level, high street banks operate in a similar way, except they tend to have much higher overheads as well as the requirement to maintain certain capital reserves. P2P lenders are smaller and more agile than these big ticket lenders, and so they can afford to take a smaller cut of any investment.

Of course, they are also required to act in a fiscally responsible manner to ensure that the platform can remain operational. In a recent note to investors, JustUs chief executive Lee Birkett acknowledged this, saying that the platform has opted to increase its borrower rate by one per cent across the board, and increase investor returns by 0.5 per cent.

“For us, retaining 0.5 per cent satisfies the ongoing financial resilience of the platform,” he said.

In short, P2P lending platforms are raising their rates because they can.

Borrower demand is high, investor demand is rising, and everyone is getting used to operating in a high-rate environment, after ten consecutive base rate hikes. The agility of P2P means that the bigger platforms can afford to make rate changes quickly, without significantly affecting the overall risk factor on their loan portfolios.

These recent rate rises showcase the responsiveness of the P2P sector, and the great investing opportunities that exist, even during difficult financial times.

Read more: P2P platforms reaffirm commitment to retail investors