An interesting Crowd?
UK interest rates have never been lower and it’s now hard to find Bank or Building Society returns above 2% per annum on your savings, even if you tie them up for a number of years. In a desperate search for better returns many people have turned to the Peer-to-Peer lending market where headline rates are as high as 7%. Before you consider this form of saving it is very important that you understand the risks.
What is Peer-to-peer lending?
Peer-to-peer lending (also known as crowd-lending) is a fairly simple concept. It brings together lenders and borrowers while bypassing the usual middlemen – the Banks and Building Societies. Lenders are seeking a higher rate of interest than they can get from the Banks, with corresponding borrowers looking to pay a lower rate of interest than they would on a bank loan.
This form of lending has been around for about ten years and is available online. There are now many active lenders, the best known being Zopa, Ratesetter and Funding Circle.
What rates of return can I expect?
Ratesetter currently quotes 2.8% (net of fees and bad debts) with easy access to your savings. Funding Circle, which lends exclusively to businesses, quotes rates of up to 7.2% but you would have to accept lower rates if you want early access to your capital.
What are the risks?
When you deposit money in a Bank or Building Society your savings are protected by the Financial Services Compensation Scheme (FSCS) up to £75,000 per individual per institution. So even if your bank goes bust you are guaranteed to get your money back (quickly). Peer-to-Peer lenders are now regulated by the Financial Conduct Authority (FCA) but they are not covered by the FSCS. You have no Government protection.
With Peer-to-Peer you are lending money to other individuals and/or businesses. The facilitator (Zopa, Ratesetter etc) is doing all of the legwork (for a healthy fee) but the lending risk is yours. Risk is reduced by spreading your investment across many small loans but there will always be the risk of bad debt as well as the possibility of the Peer-to-Peer company going bust. If the worst happened there is no way of telling how matters would be resolved or how long it would take to get your money back.
The HDA view
This is an innovative and potentially exciting way for individuals to make money but, in our opinion, placing money with Peer-to-Peer lenders should not be viewed as saving but as an investment without guarantees and with some risk of loss. Do not compare headline interest rates with those available from Banks and Building Societies – they are apples and oranges. Tread carefully, diversify as much as possible and do not commit more capital than you would be prepared to lose in the worst case scenario.
To discuss further or to arrange a face to face meeting please contact us.