And how do they differ from traditional cash savings?
Peer to Peer (P2P) lending has seen a huge growth in popularity as interest rates on savings accounts have remained in the doldrums, but as interest rates begin to rise, we are starting to see a reduction in the difference in rates between traditional savings products and their newer P2P counterparts (which should never be considered as cash savings).
A rate war started by the challenger banks has continued to push interest rates on savings accounts higher in the past six months or so, with Ulster Bank currently offering 1.25% on its eSavings easy access account, a top rate allowing you to get at your money whenever you want.
However, it is not hard to see why some savers are seduced by the rates on offer from P2P. For example, you can get as much as 7% with a number of P2P platforms, but this is at the very high end. Other rates include 4.25% gross with P2P lender Assetz Capital and as little as 1.8% with RateSetter and while both offer short-term access to your money, the latter has the condition that another lender must be prepared to take your place.
These last two rates mentioned are in excess of the general easy access rate available in actual savings, with one exception. If you have £2,500 to deposit, you can get 4.89% in the Nationwide FlexDirect Current Account, providing £1,000 is being deposited each month into the account.
However, while Nationwide tops the pile for cash savings, there are better rates available than 1.25% if you are prepared to tie your money up in traditional savings. For instance, you can get 1.8% with Atom on a one-year fixed rate bond and if you are prepared to tie your money up for three years, you can get 2.2%, again with Atom. Yes, not reaching the heady heights of 4.25% or even 7% with some P2P platforms, but this difference in rates reflects the difference in risk between the two assets.
The difficulty for some with P2P is that they do not appreciate the difference between a P2P offering and traditional savings and are wooed by the attractively high interest rates on offer without realising the greater risk. In short, the safety of your money is more assured with a bank because the Financial Services Compensation Scheme (FSCS) will protect your funds up to £85,000, if the bank should fail.
If you invest directly in P2P, you will not be covered by the FSCS. But there is a caveat, as the FSCS website states: “P2P investors will only receive FSCS cover if the investment goes wrong after they were given bad advice to invest in P2P.” So, if you were advised to undertake P2P and the investment goes wrong, the FSCS may be able help but only if you received advice.
Most P2P platforms have their own financial safety nets for customers, designed to help them if loans being offered with their investment are defaulted on.
That said, Zopa, the UK’s largest P2P lender, has recently announced that it is revamping its offering in preparation for the Innovative Finance ISA and will be retiring its Safeguard fund within five years.
So, from December 2017, new lending with Zopa will not be subject to Safeguard, but all loans that currently have this coverage will continue to receive it. This means that the Safeguard fund will be retired as of 1st December 2022, when all loans covered by the Safeguard fund would have matured.
What is more interesting is that Zopa has also applied for a banking licence for its ‘Next Generation’ bank, which will sit alongside its existing P2P business.
At launch, Zopa intends to offer FSCS protected deposit accounts and revolving credit products to complement P2P investor products.
Anna Bowes says, “This is great news for savers – to have the innovation and higher interest rates offered by the P2P market, married with true FSCS savings protection, sounds like an ideal combination to me”
Time will tell if other P2P lenders decide to go the same way. But a word of caution: The P2P market has not yet been tested – it has yet to experience a significant market correction, so it’s definitely a case of buyer beware. Even more so if the Safeguard Scheme or equivalent, are removed.
Savings Champion monitor the whole of the savings market so please call us on 0800 321 3581 to get some personal guidance on the best type of savings account for you. We can also direct you to a reliable source for advice on non-savings solutions.