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Saturday Money: Are the 15% accounts too good to be true?: Saving City superwoman Nicola Horlick is the latest to join the peer-to-peer online lending revolution. Rupert Jones reports

February 15, 2014

Rupert Jones



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, Funding Circle and RateSetter, but lots of others are snapping at their heels.

Next month, City "superwoman" Nicola Horlick (right) will join the fray, with the launch of a peer-to-peer website called Money & Co. Like many of the new sites it will allow people to lend money to small and medium-sized enterprises and enjoy returns which she estimates could initially average 8% gross, reducing to 7% after fees.

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 UK's biggest and best-known peer-to-peer site, you choose how much you want to lend (the minimum is pounds 10) and the period (up to between three and five years). Your money is then lent in small chunks to a number of borrowers, and you receive repayments each month, made up of interest and the money you lent out.

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 Funding Circle, where people lend to businesses, says its investors are earning an average of 5.7% after fees and bad debt. Some of the smaller or newer sites quote higher rates - rebuildingsociety.com boasts of an average gross yield of 15.6%, while ThinCats claims lenders can earn 6%-13%.

Why are they growing in popularity? According to industry trade body the Peer-to-Peer Finance Association, the sector more than doubled in size in 2013. That is mainly because of a perfect storm of factors: years of rock-bottom interest rates that have prompted desperate savers to seek out alternatives; a lending freeze that has hit consumers and small businesses hard; and a string of financial scandals that have led to a loss of trust in Britain's banks.

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 Financial Conduct Authority (FCA), which will mean more rights and greater protection for those who use them. There will be minimum capital requirements, rules to protect "client money", and a requirement that steps are taken to make sure repayments on existing loans would continue to be collected if a site went bust.

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."

Captions:

Nicola Horlick says launching Money & Co is one of the most exciting things she has done in her career, and that its global system will ensure it is one of the sector's early winners

Zopa:

Date launched March 2005

Quoted returns You can choose to lend for up to three years, where the projected return - after the 1% fee - is 3.9%, or up to five years, where the projected return is 4.9%

Lender investors 51,100

Your money goes to Individual borrowers

Need to know The UK's largest peer-to-peer lender, which has lent pounds 468m to date. Its "Safeguard" gives you back your money, plus interest, in the rare event a borrower cannot repay. The bad debt rate is just 0.19%. Member of the Peer-to-Peer Finance Association (P2PFA)

RateSetter:

Date launched

October 2010

Quoted returns RateSetter offers lenders four different markets, and your money is lent for a period between one month and five years. The latest annualised rates were 1.9% (one month); 3% (one year); 4% (three years); and 5.6% (five years)

Lender investors 10,800

Your money goes to Individual borrowers

Need to know Its "Provision fund", which shields savers from bad debts, currently stands at more than pounds 3m. The firm says it is unique in that "every saver has received every penny of their investment back". Is a member of the P2PFA

Funding Circle:

Date launched

August 2010

Quoted returns Investors are, on average, currently earning a net return of 5.7% after fees and bad debt, and "50% of investors are earning 6.4% or more". There is a 1% annual fee on the amount you lend

Lender investors 67,100 people have signed up, but only 28,000 are currently "active" investors

Your money goes to Businesses

Need to know pounds 219m has been lent, of which the government has lent pounds 20m. Has also partnered with six councils and a university. A member of the P2PFA

Wellesley & Co

Date launched November 2013

Quoted returns Annual rates range from 2.23% for one month to 7.5% for five years. It says: "We do not charge a specific fee or charge . . . The rate advertised is exactly what you will get"

Lender investors More than 2,500

Your money goes to Borrowers - normally investors and developers - who need a secured loan on property

Need to know It will "only lend to a borrower we have already lent to". It operates a "Provision Fund" to compensate customers, and is a member of the P2PFA

Assetz Capital:

Date launched

March 2013

Quoted returns The site says you can earn "between 10%-15% per annum gross" with no lender fees, and says its investors' average return is 12.7%

Lender investors 3,400 registered

Your money goes to Businesses and property developers

Need to know It claims it was the "fastest growing peer-to-peer lender in the world" in December, and has lent more than pounds 14m since it launched, with an expectation of hitting pounds 100m by the end of 2014.

rebuildingsociety.com:

Date launched

Operational in September 2012, first loan completed in January 2013

Quoted returns The site quotes an "average gross yield" of 15.6%, with no charges for lending

Lender investors around 450

Your money goes to Businesses

Need to know It plans to lend pounds 20m to UK SMEs by the end of 2014. Businesses are graded into four bands, A+ through to C, whereby A+ offers the lowest risk. It says: "The average interest rate earned reflects the level of risk and thus varies according to the grading"

ThinCats:

Date launched

January 2011

Quoted returns

Lenders can earn "between 6% and 13%". The site quotes a "weighted average" of 10.58%

Lender investors 2,472 members, of whom 1,166 have committed funds. Of those, about 12% are pension funds and companies

Your money goes to Businesses

Need to know Aimed at "experienced investors who understand the nature of the risks involved and probably already manage a portfolio of investments". No lending fees at present. Is a member of the P2PFA

LendInvest:

Date launched April 2013

Quoted returns "Generally range between 6% and 12% per annum (net of all fees)", the site says. It has paid lenders an "average return of 10.4%" since launch

Lender investors Around 350, ranging "from institutions to professional investors to mums and dads"

Your money goes to Residential and/or commercial property

Need to know Minimum investment is pounds 10,000. LendInvest is only involved in the buy-to-let mortgage market and every loan is secured by a first charge against property. Member of the P2PFA

Madiston:

Date launched January 2014

Quoted returns The site is offering interest rates of between 3.5% and 5.8% AER

Lender investors There were nearly 50 registrations on the website as of earlier this week

Your money goes to Individual borrowers

Need to know The company's full name is Madiston LendLoanInvest. It also

offers lenders optional membership of a compensation scheme, for which there

is a monthly fee which ranges from

0.2% to 1% of the loan amount per annum. The website is targeting a default rate of less than 1.5%. It is a member of the P2PFA

FundingKnight:

Date launched

January 2013

Quoted returns So far "successful investors have achieved rates of between 9% and 12%". It adds: "The rate you see is the rate you get - we don't charge fees to lenders"

Lender investors 1,586

Your money goes to Businesses

Need to know Free to register and invest. Loans typically range from six to 36 months; the minimum you can lend to a particular company is pounds 25. It does not have a compensation scheme and has no immediate plans to introduce one, relying instead on its "screening processes"

Lending Works:

Date launched January 2014

Quoted returns After fees have been deducted, interest rates range from

3.2% AER over one year to 5.4% AER over five years. The firm says lenders are charged a one-off upfront fee "that never exceeds 1% of amounts lent", which is taken from the first repayment made by the borrower.

Lender investors Not disclosed

Your money goes to Individuals

Need to know It claims to be the first peer-to-peer lending company to have insurance that protects lenders' money against borrower defaults and fraud

QuidCycle:

Date launched

November 2013

Quoted returns The website quotes a headline rate for lenders of 5.5%, including fees

Lender investors Not disclosed

Your money goes to Individuals

Need to know It says customers will "receive added protection from our provision fund", but at the time of writing the website appeared to lack detailed information on this fund, as well as on rates, fees etc, which may concern potential investors. It predicts its loan book willl exceed pounds 100m by the end of 2014



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Source: Guardian (UK)


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