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ALTERNATIVE WAYS TO BOOST YOUR SAVINGS

Filled your ISA? Disillusioned with low savings rates? Could peer-to-peer lending be an option for you?

But how exactly does peer-to-peer lending work, and what are the risks involved? Here we explain all you need to know to make the most of your money.


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          Investing your savings in a peer to peer lending scheme can potentially be a good way to get better returns than more conventional forms of saving.
          However, it should only be considered as part of a balanced investment portfolio and is not for everyone. Peer to peer savings are not regulated
          by the Financial Services Authority and your capital will not be protected by The Financial Services Compensation Scheme should things go wrong.
          It’s important you understand both the advantages and disadvantages before making a decision on whether to invest, some of the key points are noted
          below the products to help you make a more informed decision.

 


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Peer-to-peer savings accounts

All the Companies below are members of the peer-to-peer Finance Association

Product Headline rate Expected AER after fees and bad debt Minimum Investment Term Product review
Funding Circle
6.20%

variable Gross yield
6.20%

£20

2 days notice
Read Review

Funding Circle

Investors can currently earn an average Gross yield of 6.20% by lending through Funding Circle. However, remember that the returns you will actually achieve will depend on the rates you choose to lend at, the risk grade of the businesses you lend to, and any losses you might experience. Businesses are graded A+ through to C, with A+ businesses being the lowest risk, and you can choose which ones you want to invest in so you can manage your level of risk.

The minimum amount you can invest is £20 and there is no maximum, so you can invest as much as you want. There is a 1.00% annual servicing fee, based on the amount outstanding on each loan part. On average it take 2 days to access your money, which you can do by selling your loan parts to other investors. If you sell a loan part, there is a 0.25% sale fee. For example, if you sold a loan part with £100 outstanding, the sale fee would be 0.25%.

Remember that your funds are not protected by the Financial Services Compensation Scheme, although Funding Circle has very low annual bad debt rates of below 0.50%.
  • Choose the business you would like to invest in
  • Simple and easy online access
  • Your savings are not protected by the FSCS
  • A fee will apply if you wish to withdraw your funds outside of the contracted term
RateSetter
5 Year Income
5.20%

fixed
5.20%

£20

5 Years
Read Review

RateSetter 5 Year Income

Savers who commit to lend for five years can earn 5.20% on their investment, repaid in equal monthly instalments, which can either be reinvested or taken as an income. This rate is inclusive of fees, which are equivalent to 10% of the interest you receive.

The minimum amount you can lend is £20, and there is no maximum.

As this is a five-year investment, and your money is matched with borrowers looking for a five year Loan, you must be certain you can afford to leave your money tied up for this period of time. RateSetter is unique in peer to peer as the only operator to have returned every penny of capital and interest to every single Lender. It is able to do this because of its Provision Fund, which lenders contribute to via their ‘credit rate’. If a payment is missed, then lenders can make a claim through the fund to ensure that that they don’t lose out.

Bear in mind that peer-to-peer lenders are not protected by the Financial Services Compensation Scheme.

To lend with RateSetter.com you must be aged at least 18, be a UK resident and have a UK bank account. You will not be able to apply if you live in the Channel Islands or abroad.
  • Rates protected by RateSetter Provision Fund
  • Interest is paid monthly
  • Your savings are not protected by the FSCS
  • A fee will apply if you wish to withdraw your funds outside of the contracted term
RateSetter
3 Year Income
3.90%

fixed
3.90%

£20

3 Years
Read Review

RateSetter 3 Year Income

Savers who commit to lend for three years can earn 3.90% on their investment, repaid in equal monthly instalments, which can either be reinvested or taken as an income. This rate is inclusive of fees, which are equivalent to 10% of the interest you receive.

The minimum amount you can lend is £20, and there is no maximum.

As this is a three-year investment, and your money is matched with borrowers looking for a three year loan, you must be certain you can afford to leave your money tied up for this period of time. RateSetter is unique in peer to peer lending as the only operator to have returned every penny of capital and interest to every single lender. It is able to do this because of its Provision Fund, which lenders contribute to via their ‘credit rate’. If a payment is missed, then lenders can make a claim through the fund to ensure that that they don’t lose out.

Bear in mind that peer-to-peer lenders are not protected by the Financial Services Compensation Scheme.

To lend with RateSetter.com you must be aged at least 18, be a UK resident and have a UK bank account. You will not be able to apply if you live in the Channel Islands or abroad.
  • Rates protected by RateSetter Provision Fund
  • Interest is paid monthly
  • Your savings are not protected by the FSCS
  • A fee will apply if you wish to withdraw your funds outside of the contracted term
RateSetter
1 Year Bond
3.10%

fixed
3.10%

£10

1 Year
Read Review

RateSetter 1 Year Income

Savers who commit to lend for a year can earn 3.10% on their investment, repaid in equal monthly instalments, which can either be reinvested or taken as an income. This rate is inclusive of fees, which are equivalent to 10% of the interest you receive.

The minimum amount you can lend is £10, and there is no maximum.

As this is a one-year investment, and your money is matched with borrowers looking for a one year loan, you must be certain you can afford to leave your money tied up for this period of time. RateSetter is unique in peer to peer lending as the only operator to have returned every penny of capital and interest to every single lender. It is able to do this because of its Provision Fund, which lenders contribute to via their ‘credit rate’. If a payment is missed, then lenders can make a claim through the fund to ensure that that they don’t lose out.

Bear in mind that peer-to-peer lenders are not protected by the Financial Services Compensation Scheme.

To lend with RateSetter.com you must be aged at least 18, be a UK resident and have a UK bank account. You will not be able to apply if you live in the Channel Islands or abroad.
  • Rates protected by RateSetter Provision Fund
  • Low minimum investment & no maximum
  • Your savings are not protected by the FSCS
  • A fee will apply if you wish to withdraw your funds outside of the contracted term
RateSetter
Monthly Access
2.20%

variable
2.20%

£10

30 Days
Read Review

RateSetter Monthly Access

With this account your money is lent for one month and you can earn 2.20% on your investment. At the end of the month, you can roll your contract over or you can withdraw your funds. Borrowers are re-matched in the market with new lenders each month.

This account is similar to a variable rate, easy access account. It's ideal if you want easy, regular access to your funds, or if you're trying lending for the first time.

RateSetter is unique in peer to peer lending as the only operator to have returned every penny of capital and interest to every single lender. It is able to do this because of its Provision Fund, which lenders contribute to via their ‘credit rate’. If a payment is missed, then lenders can make a claim through the fund to ensure that that they don’t lose out.

Bear in mind that peer-to-peer lenders are not protected by the Financial Services Compensation Scheme.

To lend with RateSetter.com you must be aged at least 18, be a UK resident and have a UK bank account. You will not be able to apply if you live in the Channel Islands or abroad.
  • Rates protected by RateSetter Provision Fund
  • Short term commitment of 30 days investing
  • Your savings are not protected by the FSCS
  • A fee will apply if you wish to withdraw your funds outside of the contracted term

Help & Support

What is peer-to-peer lending?

As the name suggests, peer-to-peer lending involves people using their savings to lend to other individuals, therefore cutting out the need for banks to be involved. The aim is that those who are willing to lend could get higher returns on their savings than they would if they put their money in a conventional savings account, and in turn the individuals they are lending to could get lower cost loans than they would if they borrowed through a bank.

Some peer-to-peer sites lend to small businesses too, which for many has proved invaluable in light of current tight bank lending restrictions.

As a lender, you can choose your rate of return based on the length of time you want to invest your money for and the level of risk you’re prepared to take. For example, if you only want to lend to those with the best credit scores you will earn less than if you are prepared to lend to a higher risk group.

There are charges and fees although these are usually already factored in to the rate you see advertised – this is worth checking though.

Anyone aged 18 or above who is a UK resident, has a UK current account and is not lending in the course of a business can usually become a peer to peer lender.

You don’t need to lend large sums to invest either, most peer-to-peer investments start from as little as £10 or £20.

What are the advantages of peer-to-peer Saving?

In today’s low interest rate environment, peer-to-peer saving is proving increasingly popular, as it offers one of the few ways for savers to potentially generate returns that could beat inflation.

Returns can be considerably higher than those offered on most savings accounts, and are fixed for the period of the loan, which can usually be over either three or five years. In order to minimise the risks any money you lend can usually be split over multiple credit-checked borrowers in small chunks. Therefore if one person fails to keep up with their repayments, it doesn’t mean you would lose all your money.

Some peer-to-peer lending companies run their own schemes that guarantee to return every penny to investors through a Provision Fund which borrowers contribute to by way of a credit rate fee charged at between 0.5% and 3% of the loan.

For additional protection, most peer-to-peer schemes hold Consumer Credit Licences from the Office of Fair Trading and use the same processes and fraud prevention systems as banks, but always ask what protection is in place before becoming a lender.

What are the dis-advantages of peer to peer Saving?

Peer to peer saving should only be considered as part of a balanced investment portfolio.

Peer to peer saving is not regulated by The Financial Services Authority and your money will not be covered by the Financial Services Compensation Scheme as with most standard investment schemes if the lending company goes bust.

Investing your savings within a peer to peer lending scheme is not for everyone. Interest rates vary significantly with higher returns gained through lending to higher risk borrowers. This in turn raises the risk that you may not get some or all of your money back.

If you need to withdraw your funds early, some schemes will charge a fee for doing this and some schemes don’t allow withdrawal of your capital early at all. It is sometimes possible to sell the loan on in order to get your money out early, but there is usually a fee for doing this and could take time, meaning you can’t access your cash in the interim.

If the person you have lent the money to within the scheme defaults on their loan repayments, there is a risk you could lose all or some of your money. Also, if the borrower chooses to repay their loan early, which many people do, it will have a knock on effect on your rate of return.

Compare peer-to-peer investment options

The number of peer-to-peer schemes available has increased dramatically in recent years, so comparing them and finding the right one to suit your needs isn’t always easy. However, you can use MoneySupermarket.com to compare peer to peer investment options without having to trawl around all the different sites yourself.

Glossary of terms

AER

Annual Equivalent Rate: shown as a percentage, this is shows what rate you’ll earn over a year if the interest is compounded. If interest is paid monthly, the AER will be slightly higher than the gross rate, but if interest is only paid annually, the gross rate and AER should be the same.

Annual interest

Interest is calculated and paid once a year.

Base Rate

The country’s official rate of interest set by the Bank of England.

Basic rate tax

Basic rate tax is charged at 20% on the first £32,010 of income above your annual personal allowance. The personal allowance is £7,475 for the under 65s, £9,940 for those aged 65-74 and £10,090 for the over 75s.

Cash ISA

A tax-free savings account into which you can invest up to £5,760 this tax year. (The tax year runs from 6 April until 5 April the following year).

Easy access account

A savings account that allows you to access your money at any time. Also known as an instant access or no notice account.

Fixed rate bond

Also known as a fixed rate account, these pay a fixed rate of interest for a set term. This can be anything from six months to five years. Most only allow you to make one deposit at the time the account is opened and you can’t usually access your money during the fixed term.  

Gross

Total interest before tax.

Higher rate tax

Higher tax rate is charged at 40%. It kicks in for people earning £32,011 - £150,000. Those earning more than £150,000 a year pay the additional rate of income tax which is 45%.

Junior ISA

A tax-free savings account for children, into which parents, relatives and friends can invest up to £3,720 this tax year. The child can take over responsibility for the account at 16-years-old, but cannot withdraw any of the money until he or she turns 18, when the junior ISA becomes a standard ISA.

Monthly interest

Interest on your savings is calculated monthly, and can be paid back into the savings account or another account specified by the holder. Accounts that pay interest on a monthly basis are ideal if you want to use your savings interest to supplement your income.

Net

Interest after tax.

Notice account

An account that requires notice to be given before a withdrawal is made – typically between 30 and 120 days. You will be penalised, often with loss of interest, if you need access to your money more quickly.

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†Earn an extra £390.23 in interest over 12 months, based on best easy access savings rate from MoneySupermarket vs. average interest rate of 0.51% (Source BoE). Average balance of £26,189.68. March 2013