Life continues to be tough-going for savers. There is a fresh alternative offering 10 times the usual low rates—6 per cent and in some cases more. So what’s the catch?

Peer-to-peer lending, or P2P for short, offers far better rates than almost any savings account in today's no-inflation world. There are risks to saving your money with a P2P platform, but growing numbers of savers believe they are outweighed by the rewards.

 

Meet your peers

Web-based P2P platforms can pay higher interest rates because they directly match people or businesses who want to borrow with savers who are willing to lend cash to them. 

By cutting out the middleman, both sides secure a better rate. P2P lenders do take a cut but a lower one than the banks would take as they don't have large branch networks and lengthy staff payrolls.

Although P2P feels like a new concept, pioneer Zopa launched it more than 10 years ago. It has since loaned more than £1 billion and paid more than £57 million interest to almost 60,000 savers. Rival site Ratesetter, set up in 2010, has loaned almost £750 million.

Currently, Zopa pays rates of up to 5% a year over terms as long as six years, while Ratesetter pays up to 5.7%.You will get less if you lend your money for shorter periods, but still far more than your bank pays.

 

Risk and reward

P2P platforms may be regulated by the Financial Conduct Authority but your money isn't covered by the Financial Services Compensation Scheme, which protects the first £75,000 of savings in a bank.

The best P2P platforms work hard to reduce the chances of losing money. Borrowers are carefully vetted and rejected if they fail credit checks. Your money is also spread between scores of different loans, to reduce the damage if one defaults.

Zopa and Ratesetter run contingency funds to reimburse savers in case of any losses, but this isn't an absolute guarantee, so your capital is still in danger. The best way to reduce risk is to only lend small amounts until you are comfortable with the concept. Many sites let you start from as little as £10 or £20.

 

Don't follow the crowd

In recent years a new breed of P2P lending has emerged, known as "crowdfunding" platforms. These offer rates ranging from 7% to 15% by lending your money to start-up businesses, where the failure rate can be high, increasing the chances that you will lose money. Also, you may have to lock away your money for a number of years, with no access.

 

Taxing question

You have to pay income tax on the interest you earn from P2P, as you would with a savings account.

From next April, P2P will become eligible for your tax-free individual savings account (ISA) allowance. At that point its popularity is likely to surge, but only join your peers if you fully understand the risks.

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