Many savers are facing an uphill battle to earn interest rates that beat inflation. Although there has been a slowdown in the rising cost of living, savers will still see the value of their money eroded, unless they opt for a fixed-rate, fixed-term account or an ISA.
To outstrip inflation, a basic-rate taxpayer needs to earn a rate of 3% in a standard savings account, while a higher-rate taxpayer needs to find a rate of 3.99%. However, we understand that out of 861 non-Isa accounts on the market, only one paid as much as 3%.
However many savers have had to put up with interest rates as low as 0.5% for more than four years, which is a paltry rate of return.
So instead of putting your money into a bank or building society, why not consider a radical alternative way of investing your money, known as peer-to-peer lending.
Also called social lending, this allows savers to lend directly to individuals or businesses looking to borrow money. It often provides a better return than they would get with their bank, but there are greater risks involved and less protection for their investment.
At present, there are three big players in the market: Zopa, Funding Circle and RateSetter. These three companies have overseen about £458m of loans and many predict this figure will continue to rise.
If you are motivated to improve the returns from your savings in a peer-to-peer lending scheme because of the small amount little interest you would receive from High Street bank and building society savings accounts, then we suggest that you test the water by investing small amounts of money across a number of different peer to peer sites. You need to be aware that your funds are not covered by the Financial Services Compensation Scheme and also there is potential for loss.
However given that the rate of return on easy access accounts has fallen by an average of 68% over the past two years, and the average rate on an easy access savings account with no bonus was only 0.76%.
Savers with peer to peer lending sites report that they have experienced much higher returns of as much as 4.9% interest. So even if you accept some minor losses on investments you may still obtain a better overall return than in a one-year bond with a bank.
Peer-to-peer lending is still dwarfed by traditional bank lending to small and medium-sized businesses, which in gross terms stands at about £3bn a month.
Unlike the more traditional forms of lending, there are some additional risks to be aware of with peer-to-peer lending. These schemes do not have the same protection as savers with UK-registered banks, building societies and credit unions. Under the FSCS, the first £85,000 of their funds per person per institution is protected if it goes bust.
Check the peer to peer sites out but before proceeding ask these three questions :-
– What is the current default rate for borrowers?
– Is the site a member of the P2P Finance Association? If not, why not?
– How do you check out potential borrowers to see if they are creditworthy?
The peer to peer web sites link borrowers and lenders directly, they will shortly hit £500 million of loans in the UK.