As traditional savings rates fall, many savers are tempted to take on a little extra risk with peer-to-peer (P2P) lending. With P2P, your savings are lent out to businesses and individuals. You then get your money repaid at the end of the loan, plus interest.
Because you are getting the interest rate people are prepared to pay in order to borrow, you get a much higher rate than is offered on savings accounts. For example, Zopa is currently offering annualised returns of up to 6.5%, RateSetter offers up to 5.5% over five years, and Funding Circle up to 7.1%.
However, you are also taking on more risk. First, there's the risk that the borrowers don't pay you back. You can mitigate this by choosing a P2P lender such as Zopa or RateSetter who have provision funds in place to cover bad debts (although these funds are limited if they were exhausted by high levels of bad debts, users could still lose money). Second, P2P is not covered by the Financial Services Compensation Scheme. This means if the platform went bust, you could lose your savings.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely 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
The Financial Conduct Authority began regulating P2P firms back in 2014, but some in the industry are calling for stricter rules. The P2P Finance Association (P2PFA) has warned the industry is growing at a rapid rate and needs tougher regulation to make sure customers understand what they are investing in.
"Investors need to be aware that peer-to-peer lending products in no way resemble the guarantees represented by a bank deposit," says P2PFA, whose director has labelled as "unhelpful" certain advertisements that suggest P2P is like a bank account with instant access.
-
The top stocks in the FTSE 100After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
-
A junior ISA could turn your child’s pocket money into thousands of poundsPersuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
