Is Banking Really 'free' as they claim?

cepheus

rb10 wrote: »

It depends on your attitude to risk.

If you lend money through one of these lending websites, it's being lent out on unsecured loans. So whilst the rate charged to the borrower is higher (and thus also the rate that you receive), there is greater risk involved.

However, the majority of a bank's lending is on secured loans (i.e. mortgages). They have a lower cost to the borrower, and so also a lower return to you. But, on the plus side, they are significantly safer, due to the much lower arrears rates.

Except doesn't this security depend upon the resilience of the housing market, look what happened in the States, and the whole banking sector a few years back. It seems their lending wasn't as secure as it seemed.

I guess the lack of cover by the Financial Services Compensation Scheme, with these P2P sites increases risk further.

rb10

cepheus wrote: »

Except doesn't this security depend upon the resilience of the housing market, look what happened in the States.

Despite this, secured lending remains a significantly lower risk than unsecured.

antrobus

cepheus wrote: »

Here's an interesting way of looking at it:

If an estate agent rents out the flat you invested in, they may take 15% commission. When banks 'rent out' your money you have saved, they can take 96% commission!

I'm sure that every bank in the country would happily 'rent out' your money for only 15% commission as well, so long as you accepted the risk of not getting your money back.

P.S. You really should stop reading that blog. Those cartoonist chaps really are a but thick.:)

steampowered

Not everyone who borrows will pay their debt. Some of it will have to be written off.

How do you think the bank pays for its staff and its branches? The computer systems necessary to run a decent service?

cepheus

steampowered wrote: »

Not everyone who borrows will pay their debt. Some of it will have to be written off.

How do you think the bank pays for its staff and its branches? The computer systems necessary to run a decent service?

True the 12-month default forecast for UK prime mortgages in RMBS declined to 1.1 percent from 2 percent. In contrast the the default rate for funding circle is 0.9%. I assume they have computer systems and staff too?

Does anyone have a breakdown of the fraction lent for mortgages, business, personal loans, credit cards etc? On one end of the scale we may have mortgages on the other we have credit cards which average 15% APR in 2012

rb10

cepheus wrote: »

True the 12-month default forecast for UK prime mortgages in RMBS declined to 1.1 percent from 2 percent. In contrast the the default rate for funding circle is 0.9%. I assume they have computer systems and staff too?

The trouble is, you're not comparing like-with-like.

Firstly, only the highest quality mortgages will be used in RMBS - it's unlikely to be representative of the whole portfolio.

Secondly, this page indicates that the Funding Circle default rate is 3.6%.

dtaylor84

cepheus wrote: »

True the 12-month default forecast for UK prime mortgages in RMBS declined to 1.1 percent from 2 percent. In contrast the the default rate for funding circle is 0.9%. I assume they have computer systems and staff too?

That data is three years old...

grey_gym_sock

comparing to the rates on unsecured lending is difficult, because you should be knocking off a very large amount to cover defaults, plus a fair bit for admin costs.

it makes more sense to compare with the lowest mortgage rates available - lower default rate, and lower admin costs (proportionately lower, since the loan size is bigger). and there are lifetime trackers available at under 3%.

then knock a little off that, for defaults and admin costs. and you're paying only 1% or 2% for the current account. which does have costs of its own.

rb10

The other piece that the article is missing is the fact that if you have your money in a current account paying 0% or 0.5%, then that is just by your choice.

You could choose to have your money in a current account paying 3% (Santander or Lloyds TSB). And that 3% is a pretty good deal when it's funding mortgages that are paying the bank less than 3%. Where's the bank's income there?

ViolaLass

Thing is, for most people, the choice is between keeping their money in a bank or not, not between lending it to the bank or lending it to other people.

If you want to do P2P lending, you can. Since most people don't, that suggests they just want somewhere safe to keep their money with various amenities such as debit cards etc thrown in.

In that case, the bank are providing a free service (no fees for the basic service).