Peer-to-peer lending schemes pose risk to savers

peer to peer lending scheme

peer to peer lending schemeSavers who invest in peer-to-peer lending schemes run the risk of losing a large amount of money if a borrower fails to repay a debt.

Endless banking scandals, including the RBS-NatWest IT meltdown, have led to many people ploughing their nest eggs into money-exchange websites, which often promise eight per cent returns.

But while tempting, experts say they are only suitable for experienced investors who can afford to lose money.

Patrick Connolly, of financial adviser AWD Chase de Vere, said: "While the rates look tempting on these sites, there is a lack of protection.

"Investors should use their entire ISA allowance and have well-diversified investment portfolios before they consider money exchange websites."

What is peer-to-peer lending?

Basically, peer-to-peer lending involves lending your money to a complete stranger.

You invest your money in a website which then effectively acts as a broker between you and the borrower. They then offer you a return on your money, minus fees and bad debts, which you get after a certain period of time.

Zopa, Rate-Setter and Funding Circle are the three biggest money-exchange sites, and their popularity is on the rise.

Zopa lent 8 million of savers' money to 1,621 borrowers in July - a 70 per cent increase on last year.

Meanwhile, Rate-Setter has lent more than £10million since April, with a 150 per cent increase in users after news broke that Barclays had been rigging interest rates.

Both sites offer investors around eight per cent a year before tax and charges.

However, it's not all plain sailing and there is a significant drawback for savers: the lack of any guarantee that you will get your money back.

Unlike in bank or building society savings, your money is not protected by the £85,000 safety net if a lender goes bust.

Other alternatives

There are plenty of accounts out there which allow you to save for a rainy day - you just need to pick the one that suits you best.

Whether this is an easy access account, fixed rate bond, cash ISA or a regular saver account, they all have their pros and cons.

Offers often come and go so make sure you're on the ball when it comes to sniffing out this year's best deals.