Tread carefully in new-fangled peer-to-peer Isas

Peer-to-peer investors will be able to earn returns of up to 6% on £15,240 from April using RateSetter's newly announced peer-to-peer Isa, says Olivia Rudgard in The Daily Telegraph. Peer-to-peer (P2P) lending, where platforms match up lenders and borrowers, has become popular in recent years, and the government announced last year that savers would be able to put their annual Isa allowance into P2P loans. RateSetter is the first platform to set out full details of how its P2P Isa will work, although rivals are likely to follow soon.

The RateSetter Isa will allow investors to put money in to earn interest at a rate of their choice (of course, if you put too high a rate, you will not get any borrower). Alternatively, you can just opt for the platform's market rate. Your money then sits in the market earning no interest until it is taken up by a borrower. You will be able to choose loans of four lengths: monthly, annual, three years and five years.

Current market rates vary from 3.1% for a month to 5.9% for five years, but these fluctuate depending on demand and might change when the Isa becomes available in April. It will be possible to transfer over money from other types of Isa on top of next year's allowance, so you could invest more than £15,240 straight away if you wanted.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Allowing P2P loans in Isas is an interesting step, but the idea has its critics. They are concerned "the respectability of the Isa brand might give savers the wrong impression about the safety of their investment", as Rudgard puts it. P2P hasn't really been tested in an economic downturn, so investors need to make sure they understand the risks.

Crucially, money put into P2P platforms is not protected by the Financial Services Compensation Scheme (FSCS), unlike a savings account. RateSetter offers a "Provision Fund", designed to protect investors from defaults, but emphasises that there is no guarantee future investors won't lose out (for example, if losses exceeded the amount in the fund).

In any case, there's no need to rush to invest in April. Firms such as Zopa and Funding Circle are likely to launch similar products soon, so investors should wait and shop around for the best deal.