The Fixer: Peer-to-peer lending

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Dear Fixer,
My five-year savings account is coming to an end next month and so I need to find a new account.

The rates I have seen on offer from the banks are not very inspiring, but I have noticed that you can get much higher returns by lending the money out via a peer-to-peer lending company.

I am worried about the risks involved in getting involved with these companies, however.

Am I right to be concerned or is peer-to-peer lending a good way to get a higher return on my savings? Thank you for your help.

M Eyre, Sheffield

Dear Mr Eyre,

You are not alone in noticing that peer-to-peer lending offers better returns that most of the savings accounts available at the moment. In fact, peer-to-peer loan companies have lent out £600 million of savers' money since 2005.

Peer-to-peer lenders' low running costs allow them to offer higher returns than the banks, although the returns you can generate will depend on how long you can afford to tie your money up.

Zopa, for example, is currently marketing a three-year plan paying a projected 4% and a five-year plan with a projected return of 4.5% - and that's after the company's 1% annual fee.

However, the advertised rate is not necessarily the actual rate you will get. This is because the returns you achieve will depend on the exact rates you choose to lend at, the risk grade of the businesses you lend to, and any losses you might experience.

What's more, you do not qualify for protection under the Financial Services Compensation Scheme, which would protect the first £85,000 of your funds should the bank or building society providing your savings account collapse.

And this will not change, even though the peer-to-peer sector is to be regulated by the Financial Conduct Authority from April next year.

The good news is that peer-to-peer operators mitigate the risk of people defaulting on their loans by sharing out your money among different borrowers.

Some lenders, such as RateSetter and Zopa, also have a safeguard facility in place for their lenders - or in other words, a pot of money to cover losses in the event that a borrower starts missing payments.

To summarise, investing your savings with a peer-to-peer lender is higher risk than taking out a traditional savings account.

However, most people get the returns they are promised and it remains less risky than investing in the stock market, for example.

If you still have concerns, you might want to try investing a small amount at first and seeing how it goes. Most peer-to-peer lenders allow you to invest as little as £10 or £20.

The Fixer

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