With savings accounts offering increasingly poor interest rates, what else can you do to boost your finances. Aside from stocks and shares, buying property or even selling your unwanted stuff online, you could try peer-to-peer lending. This is a fairly new idea that offers potentially larger gains for almost no work at all. We show you how and where you can lend your money for profit.
What is peer-to-peer lending?
The idea behind crowd-lending, as it’s also known, is that you loan people money and then they pay you back with interest. Now, while this sounds like you’re entering into the murky world of loan-sharking, it’s actually a bit more organised than that.
To save you effort and stress you sign up with a peer-to-peer lending company which acts as the middle-man, handles the collections, loan allocations and - naturally - takes a cut of the interest.
You provide a sum of money to be loaned, and agree for it to remain available for a set amount of time, such as five years. This allows the loan company to make the money work effectively and if things all go well then you should see a return on your investment that would be greater than any on offer from savings accounts.
In most cases you can withdraw your money from the sites early, as the loans will be bought buy other investors, but this can incur fees - although these are usually low.
How do I know that my money is safe?
Did you notice we called this an investment? That’s important. Savings accounts are very safe and usually covered by the Financial Services Compensation Scheme which guarantees that you’ll receive up to £85,000 of your savings if the bank or building society goes under. Investments - just like when you invest in shares or Kickstarter projects - come with associated risk. This is why you can make bigger profits, but nothing is guaranteed.
When you loan your money to a peer-to-peer company you are making an investment, and therefore you should apply to old gambling adage of never investing more than you can afford to lose.
There are safeguards involved though, which should help you gauge the odds. The peer-to-peer companies cherry-pick the loan applicants, measuring them against credit scores, as they want the loan to be successfully repaid in order to receive their commission.
Most companies will also have insurance to protect against going bust. In these instances the investors will often have a third-party loan collection company provided to ensure that the money continues to be recovered.
But it’s still a risk, so make sure you read the guarantees and terms & conditions on any site you're considering using.
If you’re in any doubt at all then it's worth contacting an independent financial advisor. Peer-to-peer lending is a regulated sector of finance, but due to the fact it's relatively new it’s still hard to predict how successful this industry will be in the future.
How do I use a peer-to-peer loan company?
There are a number of peer-to-peer companies in the UK, all of which offer different terms and guarantees.
This is a well established peer-to-peer lender that specialises in loans to small businesses. So far the company has lent over £2.5bn, with 25,0000 businesses on its books. The UK government even granted Funding Circle £40m so it could help small companies with loans.
When you sign up you’re able to decide whether you want to loan to one company, whose details you’ll receive, or spread your money across a range. You’ll see various interest rates attached to each loan proposal, and can choose the one that fits your risk threshold. Higher the interest, higher the risk.
This site is one of the most trusted UK lenders, with a multitude of awards under its belt. The loans offered by Zopa are to a mixture of individuals and organisations, which provides a wide range of risk and rewards to choose from.
At the moment, due to the increased popularity of the site, you need to sign up to a waiting list if you want to invest. But judging by the past performance of Zopa, that’s probably a good idea.
Financial advice site moneyexpert.com says Ratesetter is a good place for beginners, mainly due to the layout and style of accounts. In essence they resemble normal building society savings accounts where you put money in and this is then invested on your behalf.
You get to choose the rate you wish to loan at, and there are financial incentives on offer if you keep your account above a certain threshold for a year.
Should I invest in peer-to-peer lending?
Peer-to-peer lending is certainly an innovative approach to finance, and one that appears to be doing well in recent years. In the end it’s your money, so you’ll need to decide whether you want to risk it or not, but from what we’ve seen this sector is certainly a interesting option that looks set to grow.