Should you ditch your bank and invest in a lend-to-save instead?

April 30, 2013 at 2:53 pm

Officially known as peer-to-peer lending, lend-to-save cuts out the banks and allows investors to lend directly to borrowers.

The benefits are interest rates of up to 8%, markedly higher than the meagre offerings of today’s high street banks. Meanwhile, for borrowers there is no such thing as an early repayment penalty and lenders can even get their money back early for a marginal fee.

The first such enterprise began in the UK in 2005 and has so far been a roaring commercial success. To date Zopa has lent out more than £290 million and hot on its heels are two emerging competitors – Rate Setter and Funding Circle.

This new financial industry has been warmly welcomed by some sectors of the UK establishment with the UK Government, Huddersfield University and Lancashire County Council all lending money via Funding Circle.

With a lack of industry regulation, however, there is an increased risk of losing your money.

The Financial Services Compensation Scheme which guarantees £85,000 of a saver’s deposit does not apply to peer-to-peer lending. As such each company offers its own way to protect lenders’ deposits. If borrowers default on their loans, Rate Setter offers a fall-back fund and they have never failed to pay a lender back. Funding Circle, although suffering from the highest loan default-rate, offers lenders the ability to spread their risk across multiple borrowers, splitting their investments into smaller blocks and earn more interest by taking on higher risk loans.

All in, lend-to-save offers an interesting option for the small-time investor but be sure to remember that this is an investment and not saving. Don’t put all your eggs in one basket, check the real return you will make after paying tax and only ever invest as much as you can afford to lose.

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