Savers turn to peer-to-peer lending


purseMore savers are turning to online firms such as RateSetter and Zopa in the search for better returns on their cash, a consumer group has found.

A survey of 4,500 Which? subscribers in April found that 9% had used a peer-to-peer (P2P) lending website such as these in the last two years, rocketing from 2% when similar research was carried out a year ago. The overwhelming majority of savers (81%) who had used a website put their main reason down to the poor returns on offer generally.

P2P lenders act as "middle men" who match savers who have some cash they are willing to lend with borrowers, including individual consumers and small businesses. The interest savers receive comes from the rate paid by a borrower, with the online middle man taking a cut.

Trade body the P2P Finance Association, which represents Funding Circle, RateSetter and Zopa, the main players in the UK, said the three businesses have set up over £500 million of loans so far. Investors are typically in their late 40s and around one in eight is retired. The average saver lends around £5,000.

P2P lenders have low overheads and the rates they can offer to savers can be as high as 15%, although the average returns were found to be around 3.6% and 6.3% before tax, according to the Which? investigation.

Which? asked its members to rate the three main P2P lenders in terms of customer satisfaction, including how well sites explain risks, ease of use and savings rates. RateSetter and Zopa were both given a customer score of 65%, while Funding Circle achieved 61%.

Which? described the scores as "impressive" and 81% of its members who had used P2P lenders plan to continue using their provider.

The findings come at a time when savers have struggled to make any real money in the low interest rate environment. The situation has worsened in recent months, following the introduction of the Government's Funding for Lending scheme, which gives lenders access to cheap finance to help borrowers. Experts have said the initiative has made lenders less reliant on attracting savers' deposits.

The top tax-free cash Isa currently on the market pays 2.3% in interest, according to financial information website Moneyfacts.

People who invest their money with a P2P lender are taking on bigger risks than with a bank and could face a situation where the borrower defaults. P2P investors do not have the protection of the Financial Services Compensation Scheme, which guarantees up to £85,000 of a consumer's cash if their financial institution goes bust.

© 2013 Press Association