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Is Peer-to-peer lending a good way to earn more interest?

Last Edit: 11/09/18

I assume you are comparing peer-to-peer lending income to the savings income earnt from high street banks (currently offering in the region of 1-1.5%). Peer-to-peer lending can return a higher amount of income (interest income), but whether it is "good way" to earn more interest is left to the discretion of the investor. Ratesetter, an award winning peer-to-peer lending portal -- responsible -- highlights the risks involved in peer-to-peer lending on their homepage: "Capital at risk. No FSCS protection. Instant access not guaranteed." In comparison, funds saved with FSCS protected banks -- most UK high street banks -- are automatically protected up to £85,000, this capital is not at risk, and instant access is guaranteed with 'easy access' savings accounts.

So how does peer-to-peer lending work? The leading peer-to-peer lending companies -- Zopa and Ratesetter -- loan money to individuals, businesses and property developers. These loans can be secured and unsecured (more risk). The peer-to-peer lenders claim to 'vet' applicants for loans for their creditworthiness and affordability; they use credit reference agencies (like banks do), check for bankruptcies, recent defaults, check banks statements etc. Investors can then invest in a portfolio of loans to households and businesses that have been approved by the peer-to-peer lender.

So, how does the income earnt from peer-to-peer lenders compare to the high street bank? Ratesetter and Zopa currently have annualised (one year) projected returns of around 4%-4.4%. At present, the best easy access savings account pays 1.4% (Coventry BS) and the best fixed-rate account pays 2.02% (ICICI Bank UK).

In conclusion: Peer-to-peer lending is provided by companies who are not covered by FSCS protection: this means you can lose your money in the worst case scenario. However, the three biggest peer-to-peer lending companies-- Zopa, Funding Circle and Ratesetter -- do explain the risks involved, the benefits compared to banks, and in some cases have protection against defaults (Ratesetter's Provision Fund). Peer-to-peer lenders differ in how they operate, with Zopa and Ratesetter making the process as simple as possible, and Funding Circle giving more control over who an investor invests their funds with. The lending term and penalties for early withdraws differs with each peer-to-peer lender. While the peer-to-peer lenders may compare their services to those provided by banks, for those investing funds with them, they should consider it as an investment and not as a savings account.