There are four accounts to choose from, with returns paying up to 5.60% AER. With such attractive rates already on offer, this £25 cash incentive is really the icing on the cake. But there’s a lot to take in with these accounts, so read on…
What’s the deal?
First off, you should know that RateSetter is not a regular bank or building society. It’s a peer-to-peer lender which means your cash is lent direct to other individuals who are looking for a low-rate loan. Because no bank or building society features in this process, the idea is that savers (actually known as lenders) get higher returns on their cash – and borrowers get a better rate too.
Peer to peer providers will fall under regulation from the Financial Conduct Authority (FCA) as from April this year. But this DOESN’T mean your savings will qualify for the Financial Services Compensation Scheme (FSCS) which protect the first £85,000 per person should a traditional provider go bust.
You can learn more about what happens to your money when you save via a peer to peer lender with Laura Howard’s article.
If you are happy with this arrangement, the next job is to choose which RateSetter account you want to save your cash in. The flexible Monthly Access account pays 2.20% and allows access to your cash with no notice or penalty once your account is 30 days old. Interest is paid at the end of each monthly term.
RateSetter’s 3-Year and 5-Year Income accounts pay 4.70% and 5.60% respectively. Obviously this means locking in your cash for longer, but you can take advantage of its sell-out feature, which lets you exit early for a fee.
The 1-Year account pays 3.90%, with both your capital and interest paid out in a lump sum at the end of the year. Again you can access your cash earlier for a fee.
These advertised returns already reflect a fee of 10% of interest paid that RateSetter charges – so the rate you see is the rate you get.
If you open any of these accounts via MoneySuperMarket, you will receive a one-off cash bonus of £25 that will be added onto your balance. And if you already hold an account with RateSetter and introduce a friend, you will qualify for the £25 windfall too.
Who is it good for?
Peer-to-peer is a great option for long-suffering savers who are struggling to find decent returns on mainstream savings accounts. You will also have to be comfortable with not knowing who you are lending to. That’s because, unlike some other peer-to-peer lenders, RateSetter is an anonymous service. What you can be sure of however is that your cash will go to consumers and not small businesses (as is the case with Funding Circle, another peer-to-peer lender).
You also won't know how many people your money will be lent to as it will depend on the amount you are investing – and at what point in time. For example, if you want to lend £2,000 and a borrower is looking for £2,000 at the same time, it might go to one person. But in most cases it's more than one person, according to the website.
As we have mentioned, while the rates – and £25 deal on these accounts – are attractive, none of them are covered by the FSCS. However, your money is protected by RateSetter’s own Provision Fund, a pot of cash funded collectively by RateSetter’s borrowers which compensates you for late payments or defaults.
Also, you’ll only get the £25 cashback when you invest £1,000 or more.
What’s the verdict?
If you understand and are happy with the elevated risk of peer-to-peer savings you’ll find rates far more attractive than those on offer in the conventional savings account market. The added cash incentive also means that if you invest the minimum £1,000, you’ll effectively boost the rate of whichever account you go for by 2.5% for the first year.
You shouldn’t put a penny in a savings account until you’ve used your full, tax-free ISA allowance each year. In the Budget last week we heard that, under the New ISA (NISA) this will be increased to £15,000 from July 1. And the larger allowance can be held in either cash, stocks and shares or any division between the two that you choose. Between the new tax year (April 6) and July 1 your cash allowance will still be £5,940. Read more on this here.
The Chancellor also said that peer-to-peer savings accounts will be allowed to be held in tax-free ISAs which is great news – but details and a date for this have not yet been set.
As mentioned, peer-to-peer will also be regulated by the FCA from April, giving customers greater protection by forcing providers to be clear and upfront about their products, and introducing a 14-day cooling off period for lenders and borrowers to pull out if they change their minds. You can read more about this with Melanie Wright’s article.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.