Peer-to-peer loans: Can you get better returns by lending your cash to others?
When peer-to-peer lenders arrived in the UK a few years ago, I was terribly wary of them. They offered the opportunity for me – and you – to lend our money to other people.
But why would we want to? Lending money to anyone is risky. And who wants that risk? Then there was the fact that we could stick our money into a decent deposit account which offered security as well as decent returns. But, of course, the latter is no longer true and hasn't been for years, with interest rates at an all-time low.
So with hard-pressed savers lucky to get as much as 2 per cent interest on their cash in a bank or building society, the higher returns available from peer-to-peer lending have become much more attractive.
It's easy to be confused about what the firms offer, but it's simple. They take your cash and lend it to others in return for a small fee. With no big banks involved, savers can get higher returns and borrowers lower rates. And as the industry has matured it's become mainstream.
This week that fact was recognised by the Banking Commission. In its long-awaited report on banks it said: "Peer-to-peer and crowdfunding platforms have the potential to improve the UK retail banking market as both a source of competition to mainstream banks as well as an alternative to them."
David Black, banking specialist at Consumer Intelligence, says: "The peer-to-peer platforms are offering a real alternative to the established banks. While there are other factors to be taken into account, they are offering higher rates to savers than are available from bank or building society savings accounts."
The biggest is Zopa, which matches savers with individual borrowers. It has lent £320m to UK consumers, lending £107m in the last year. "We're spearheading the consumer choice that bypasses the banks and provides a higher reward for being good with money," says boss Giles Andrews.
Meanwhile, Funding Circle – which launched in 2010 to put savers in touch with small firms looking to borrow – has recently passed the £100m lent milestone and says it's on course to reach another £100m in the next year.
Co-founder James Meekings says: "Our growth demonstrates that peer-to-peer lending is challenging the way business finance is done with an army of British people helping to fill the gap by lending directly to ambitious businesses."
They're fine words from folk keen to promote their businesses, but should you really be considering peer-to-peer lenders as an alternative home for your savings? What about the risk, essentially, that people or companies borrowing your money don't pay it back?
"For savers it's important to understand there is no cast-iron guarantee as you get with bank or building society accounts under the Financial Services Compensation Scheme," points out Andrew Hagger of our Money Insider column.
The compensation scheme means that in the unlikely event of your bank going bust your savings would be protected, at least £85,000 of them. With the peer-to-peer lenders the scheme does not apply, so your cash is at risk.
However, some of the main peer-to-peer companies have introduced their own safety net to reassure savers. RateSetter – which has lent more than £74m to individuals – uses a provision fund to shield lenders from bad debt. Currently it has a balance of just over £1m which, according to the firm, is enough to cover its actual bad debts experienced so far six times over.
Meanwhile Zopa has a "safeguard" feature, which offers similar reassurance to worried savers.
Even without that, default levels – where people or businesses fail to repay loans – are low. With Zopa the default level is 0.76 per cent while RateSetter quotes 0.35 per cent. Also, you can spread the risk by sprinkling your savings around different borrowers. The deals are done online, so it's fairly easy.
Given all that, are the returns you can get that much better? "In this era of low interest rates, the peer-to-peer platforms are offering higher rates to savers," says David Black. For instance, while the best three-year, fixed-rate account was 2 .55 per cent with ICICI Bank, at Zopa you could get 4.3 per cent.
Mr Hagger has turned to peer-to-peer himself. "A Tesco Bank fixed-rate bond matured in May, but when I came to renew, the best one-year, fixed-rate bond rates on the market were just 2 per cent. I put my funds with RateSetter for 12 months and got a rate of 3.1 per cent."
So peer-to-peer lenders can offer better deals, for borrowers as well as savers, incidentally. But should you use them? Only if you are comfortable with using their online sites.
Buyers beware of new-build home headaches
Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help
Five Questions On: GB Energy's new tariff
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Money roundup video: Warning for mortgage borrowers and Premium Bonds boost
- 1 'Cheeky' Nando's under fire for apparently coming onto a customer on Twitter
- 2 Saudi Arabia mosque bombing: Two volunteer security guards hailed as heroes for stopping Isis suicide bomber reaching worshippers
- 3 Playboy model April Summers speaks out about being a victim of revenge porn
- 4 There is something wrong but very right about this Bible illustration
- 5 iPhone 'effective power' text: how to be safe from iOS bug that lets people crash your phone
EU referendum: David Cameron's rules are a 'democratic disgrace', says French-born Scottish politician set to be denied a vote
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
A nation of inequality: How the UK is failing to feed its most vulnerable people
Australian man punched in the face for defending Muslim women from abuse on train
EU referendum: David Cameron to deny EU migrants and under-18s the chance to vote
David Starkey 'tells Amal Clooney to shut up and stop over-promoting human rights'
iJobs Money & Business
£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...
£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...
£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...
Day In a Page
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool