What is peer to peer lending?
Peer-to-peer lending sites match up savers who are willing to lend their money with borrowers typically individuals or small businesses. Both parties can benefit because rates are often better than those on offer from banks. Savers can get interest on their savings up to 5 times or more what they can get in a traditional savings account while those looking to borrow can borrow at rates as low as 5% on a 5 year loan.
How can peer to peer savings offer me the potential for better rates than banks?
Peer-to-peer lender sites can often be in a position to offer better rates than banks to both savers and borrowers alike. But how are they able to do this? Essentially, peer-to-peer lenders can be more efficient than the traditional banks – they have lower overheads, fewer staff and no high street branches to pay for. This means that the savings made can be passed on to savers lending their money and borrowers.
What are the advantages of peer-to-peer lending?
- You can earn relatively high interest returns on your savings
- Interest can be paid monthly
- Many peer to peer lenders offer easy access to your money if you need to get hold of it at short notice.
- Some peer-to-peer lending companies run their own protection schemes in the event that a borrower is unable to pay back the loan through a fund borrowers contribute to by way of a credit rate fee charged at a small percentage of the total loan.
- You can choose how to lend money based on the length of investment and the level of risk involved.
To lend you will usually need to be:
- Aged 18 or over
- A UK resident
- Have a UK current account
- You can invest from as little as £10 with some peer to peer lending sites.
What are the disadvantages 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 Conduct Authority and your money will not be covered by the Financial Services Compensation Scheme.
- Investing your savings within a peer to peer lending scheme can mean interest rates vary significantly – generally speaking higher risk borrowers will get higher returns. But this raises the risk that you may not get some or all of your money back.
- If you need to withdraw your funds early, you may incur a fee.
- If the person you have lent the money to chooses to repay their loan early, this can affect your rate of return.
- The interest you earn is subject to income tax in the same way as normal savings
Peer to peer lending to be included in ISAs
For those savers who are keen to try peer to peer lending, the 2014 Budget offered a positive outcome with the news peer-to-peer lending will now be included from 2016.
Peer to peer savings accounts are not the same as normal savings accounts so you need to consider the features before you invest.