Increasing numbers of savers are turning to peer-to-peer lending in the hunt for competitive returns, with more than £1 billion lent in the first three months of this year alone.
The Bank of England first cut the base rate to 0.5% in March 2009. It was reduced to 0.25% in August year, meaning savers have had to endure more than eight years of rock bottom savings returns.
As a result, many people are looking at alternative ways to generate inflation-beating returns, with peer-to-peer lending proving one of the most popular options.
When you save through a peer-to-peer lending website such as Assetz Capital, RateSetter, Zopa, or Wellesley & Co, you are effectively lending money to businesses or people who need to borrow money.
The aim is that savers lending their money can achieve higher returns than they might find from a bank or building society account, and that borrowers can take out a loan at a lower rate that they would at a bank.
According to Assetz Capital, in the four years it has been operating, lenders have earned a gross total of more than £21m in interest and have provided over £250m worth of funding to businesses throughout the UK.
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Stuart Law, chief executive and founder of Assetz Capital, said: “There are now few options for investors to earn decent risk-adjusted returns at present. Savvy investors have started turning to peer-to-peer lending. People often start small - investing £100 or so to see how it works, and once they are comfortable with it, they invest more.”
As a general rule, the longer the period you agree to lend your money over, the higher the returns you will be able to achieve. Research conducted by 4thWay, an independent ratings agency for the peer-to-peer lending market, found that the average lending interest rate on peer-to-peer accounts that offer free early access is 3.16%, compared to an average rate of 4.92% on other peer-to-peer accounts.
Neil Faulkner, co-founder and managing director of 4thWay, said: “Bear in mind that with the accounts marketed as easy access, you are usually accepting a lower interest rate in return for free access, but swift access is still not guaranteed. “Lenders should therefore consider longer-term accounts over easy access, with a view to paying modest early-exit fees if they want to leave early.”
The main downside of saving via a peer-to-peer lending site is that your money won’t be protected by the Financial Services Compensation Scheme (FSCS). This protects deposits up to £85,000 per person per financial institution if the company you save with runs into financial difficulties. The peer-to-peer lending industry is however regulated by the city regulator the Financial Conduct Authority (FCA), and all peer-to-peer companies must have a minimum of £50,000 worth of capital, or more for larger companies, held in reserve which they can use as a buffer if necessary.
Most peer-to-peer lending sites carefully vet the businesses and people they lend to, and offer their own ‘provision funds’ too, so that they can compensate you if borrowers or businesses default on their loans to you.