Websites that bypass the banks by matching up savers with borrowers are taking off in a big way - and with some claiming to offer returns of 10%-15%, it is no wonder punters are piling in.
New companies seem to be launching almost weekly, prompting suggestions that this will be the year that "peer-to-peer lending" explodes into the mainstream. So should you be signing up - and is it safe?
What are they? Peer-to-peer lending sites put savers with money to lend in touch with individuals or small businesses that need to borrow. The idea is that both benefit from better rates than they could get from financial institutions. The three best-known players are Zopa,
Next month, City "superwoman"
Money & Co is due to go live on 17 March, and the mother of six, whose business ventures already encompass the worlds of investment, movies and restaurants, told Guardian Money that out of all the things she has done in her career, "this is one of the most exciting. There's a real need. It will help companies, help the economy, and help individuals to get a better return on their cash". She believes the sector is still in its infancy, but adds: "I would expect us to be one of the winners . . . Our system is built to be global."
How do these sites work for savers? They all operate in different ways, and the sites that lend your money to businesses tend to offer higher rates than those lending to other individuals. Some, such as Zopa and RateSetter, are at the mainstream end of the sector, while others are more niche or high-end. In the case of Zopa, the
What about returns? Zopa says its lender investors can expect to make 4.9% interest over five years, after its 1% annual fee is deducted, or 3.9% over three years. Some may feel that isn't enough, bearing in mind the risks.
RateSetter this week quoted rates of 1.9%-5.5%, while
Why are they growing in popularity? According to industry trade body the
Any downsides? Yes - there is little regulatory protection for investors and borrowers, though this is about to change. From 1 April peer-to-peer lenders will be policed by the
But, crucially, peer-to-peer sites aren't covered by the official Financial Services Compensation Scheme , which guarantees your savings up to the value of pounds 85,000 - and there are no plans to change this. Neither should you assume you can immediately access your cash: each operator has different rules, but your money might be locked away for months or longer.
Worryingly, when the FCA reviewed 21 peer-to-peer websites last August, it found that many "downplayed" the risks and used "misleading and potentially unfair" comparisons with bank and building society accounts. The regulator warned that some sites were emphasising a headline rate of return "that is often in double figures, without an explanation of the impact of charges, default rates and taxation". It added: "In some cases it appears the actual returns to customers can be substantially less."
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