Better savings rates without the risk – a rival to the banks?

by , Money Researcher Money 31 January 2013
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Investing money with peer-to-peer lending sites has always had risk attached. Although rates of return can tower above traditional savings accounts and Isas, your money hasn’t been protected – until now.

A pile of coins

When you invest with a peer-to-peer lending site, there’s an element of risk that’s understood when you sign up – people who borrow your money could potentially default on their loans.

But there have been bigger risks too. After all, without cover from the Financial Services Compensation Scheme, you could potentially lose some or all of your money if the site you’ve invested through goes bust.

Cutting down the risks

However, that could soon change under plans to regulate the peer-to-peer lending industry from April 2014 under the scope of the Financial Conduct Authority. We want to make sure its proposals lead to raised standards and greater consumer protection, and will help people make informed decisions about the risks and returns of this new way to borrow and save.

Peer-to-peer lending sites such as Zopa, Funding Circle and RateSetter have become increasingly popular in recent years – not only among savvy savers, but also with consumers and businesses unwilling or unable to access funds from the banks.

The rise of peer-to-peer lending has been largely been built on interest rates that beat the banks. And now, with one of the major risks neutralised, we hope those appealing benefits will stick around.

A challenge for the banks?

Combined with increased consumer confidence, this pioneering industry has the potential to shake up the traditional banking system. In fact, Andrew Haldane, a director at the Bank of England, recently claimed peer-to-peer platforms could render some bank functions surplus to requirements in the future.

So far, the big banks have lost little sleep over the emergence of peer-to-peer lending. But the government’s intention to invest £55m in such sites to increase their reach is another key step in this sector’s climb to prominence. It’s yet another wake up call to the banking sector that it needs to change. If you snooze, you might just lose.

Have you ever used a peer-to-peer lending site, or do the risks put you off? Will the new protection from the Financial Conduct Authority give you more confidence to invest in peer-to-peer lending?

9 comments

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rarrar

I’ve recently started using Zopa for some of my savings and it is important to be aware of the risks from bad debts.
Interest rates after fees and allowances for bad debts are however not as high as they used to be and will get depressed even further if large amounts of cheap money gets made available through them.

However it is annoying that unlike businesses who lend money , individuals cannot offset any bad debts against the interest they receive for tax purposes.

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sea primrose

The interest rates available on Zopa have dropped over the last year, and no longer cover the risk of lending. The same is happening on Funding Circle, and this will be worse once the £20 million of Government money is injected into the system.

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rarrar

It does depend on how much the extra risk is worth. Zopa at present is about 2 – 2.5% above what you can get from the banks after allowing for estimated bad-debts, some people would consider this reasonable – I do !

Hi rarrar and sea primrose,

Thanks for your comments. Yes, it is very important to be aware of all fees and risks, including bad debts, but sites like Funding Circle, RateSetter and Zopa do display these pretty clearly on their websites. Anyone interested in peer-to-peer lending really does need to read these carefully and understand them before investing any of their money.

You’re right that rates across a number of sites have fallen over the last six months. I, like many others I’m sure, are watching the markets with interest to see if/when they will pick up again. This just illustrates why we at Which? have always said that investing in peer-to-peer sites should form part of a wider investment portfolio.

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geoff_s

It’s not G2P its P2P

It’s laughable that our government will squander £55M on P2P sites. They intend to borrow the money on our behalf and use it to compete with us, the general public. The result will simply be a reduced interest rate, which will price out a comparative number of lenders.

If they wanted to boost the industry they permit allow bad-debts to be written off from interest earnings. The general public can then compete on a level playing field with the banks. While this tax anomaly remains it is the government itself that is the main blockage to an increase in P2P

Please government. Stop borrowing money to squander on cheap publicity gestures & do your job… legislate away this tax unfairness.

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sea primrose

You are so right. This applies even more to the government’s stance on lending to businesses. The banks often won’t do it. Funding Circle investors take the risk, but with the dropping interest rates small investors can come unstuck with just one or two bad debts because of the lack of tax relief. You have to invest over a large number of loans a small amount per loan. This takes a very long time to achieve.

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rebuildingsociety

We’ve recently joined as Which? subscribers. I believe the P2P industry is set to grow thanks to the impending light regulation and the the incentives announce in the budget recently. Investors will be able to have up to £15,000 tax free as part of their ISA.

To get access to better rates, its worthwhile researching some of the newer players in the P2P industry, who achieve better interest rates, while taking good security.

If you’ve thought about P2P lending but never tried it, now is a good time to give it another look…

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geoff_s

There’s no SFC Government backed safety net on P2P accounts (£85k per account). So putting £15,000 ISA into a single P2P company would be a risky thing, unless you’ve say £150k-£300k of cash savings. I’d have thought perhaps 5%-10% of someone’s cash savings might be the maximum to risk without the safety net.

Perhaps Which? could keep asking the P2P association, when they will be able to join the guarantee scheme?

Until P2P companies absorb the financial & legislative costs that will allow them to join the guarantee scheme, it is rather dishonest of them to directly compare their rates to those of savings accounts.

Previously you could only open one cash ISA per year. I can’t yet see if the ISA rules have now be changed. Are you now allowed to spread the risk for instance with £5k in 3 different P2P companies in the same ISA year?

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geoff_s

If Zopa are sticking with their high 1% charges, it would seem hard for them to compete on returns with the newer P2P companies.

For instance 5 year investments today 5% in Zopa & 5.7% in Ratesetter.

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