The easy saver account at my bank pays a princely 0.25% interest. Suppose I open up its cash Isa and take advantage of my tax-free allowance instead, the rate increases to 0.8%. If I am prepared to move the money and put it in the very highest paying instant savings account in the market, the amount of interest crawls up to just 1.65% – and that from a bank even I have never heard of. On top of this, the Bank of England decided yet again to hold the base rate at 0.5% at its latest monthly meeting this week. With no sign of ever getting a decent return on my cash, I have finally capitulated.
For years, we have written in Guardian Money about the tantalizing rates on offer from “peer-to-peer” lenders. These are the internet-only operations that offer lonely hearts service for people who have money, matching them up with people who want to borrow it. By cutting out the banks, they offer much higher rates of interest. First out of the blocks in 2004 was Zopa, and it has since had £1bn come through its doors. RateSetter and Funding Circle are probably the best-known names among the many P2P operators that have launched since, with varying success. Rates on offer vary from 3% to north of 8%, depending on the borrower’s credit quality (or not). More recent arrivals such as Folk2Folk promise 6.5% interest, claiming that this is rock solid and secured against property.
With no sign of ever getting a decent return on my cash, I have finally capitulated. But like 99% of savers, I’ve thought, yes, interesting, but … too risky. No Financial Services Compensation Scheme protection; no branch where I can pop down and demand my money back. Instead, my cash temporarily sits on some server in Greenland, its return dependent on the fancy metrics used to discern if an applicant will pay me back or not. Worse, the P2P lenders generally want you to lock your money away for three to five years – terms often longer than the company has been in existence.
But last month, I took the plunge. RateSetter has an account that locks your money away for just one month and pays interest of around 3%-3.5% (it dips up and down hour by hour as lenders and borrowers are matched up). It was shockingly easy to open – in little more than three minutes, I had an account and transferred across £5,000. Matching it with borrowers took rather longer – another 24 hours – but I was told I would earn 3.1%.
A month later, I received my first statement. And what a huge disappointment it was. My £5,000 had earned a miserable £4.51 – equivalent to just 1% interest rather than the £12.92 implied by the 3.1% rate I was promised. Fortunately, when I checked again two days later, it looked more realistic: my account showed interest paid £12.42. Meanwhile, the money has been automatically reinvested for another month, this time achieving (I’m told) 3.3%.
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I asked RateSetter to explain how I got £12.42 rather than £12.92. I got a comprehensive explanation, but in short, it’s complicated – to do with maturity dates on various loans taken by borrowers, one of which one finished a day earlier than another. From next April, savers will be able to put as much as £15,240 into a P2P Isa and shelter it tax-free. My conclusion? I’m rather keen on it. A colleague has been with Zopa for years and has lost just £7 in borrower defaults. On the plus side, the P2P sector, while unlikely to ever be covered by the FSCS, has had an endorsement from financial regulators of sorts.
From next April, savers will be able to put as much as £15,240 into a P2P Isa and shelter it tax-free. The predictions are for a huge new influx of money, and a tiny part of it will probably be mine. That said, if there is one thing we have learned from the financial crisis, it’s that as much as we may hate the big banks, we know the government will always rescue them. Lloyds is “systemically important” to the UK financial setup; Zopa and RateSetter are not. There will be no government lifeboat to rescue you if they sink.