Published on July 22nd, 2012 | by Tom Wake1
How to dodge ‘rip off’ banks and get the best rates with peer-to-peer lending
Not any more. With today’s low interest rates you’ll be lucky to get 3% or 4% on your savings. Worse still, banks are so petrified of lending that they’re not passing low interest rates onto borrowers.
With a new banking scandal seemingly every week, who wants to invest in the banks anyway? It’s not like you’re putting those savings into the pockets of a trusty ally.
Even some of the most ‘reputable’ banks have proved themselves to be self-congratulating, risk-taking and possibly rate fixing outfits (and there’s A LOT more scandal to come on that by the way).
It’s an uneasy and slightly mucky situation all round.
Don’t worry, I’m not about to go off on a ‘down with the bankers!’ rant, Insider’s Edge is about finding solutions, I just wanted to present the dilemma to you as it stands:
Now is not a great time for savers OR borrowers.
So how can we fight back and get a better deal?
Whether you’re borrowing or saving there are a number of low-risk alternatives that could provide you with a far better rate – without the banks getting a look in.
Do you remember when Betfair revolutionised the gambling industry?
They created a betting platform that took the power away from bookmakers and put it squarely in the hands of ordinary punters. This is a bit like that – except forget the gambling bit.
You see thanks to the Internet (and an army of maths boffins) there’s now a way to invest and borrow money online just like a bank would – without the pinstripe suits. You get a rate that’s mutually agreed upon – and you can literally be set up in minutes.
It’s called peer-to-peer borrowing/lending and here’s how it works.
Person A has some savings. He’s tired of keeping his cash in the bank accruing a measly 1% interest and wants to get a better rate. Meanwhile Person B needs a loan to kick start his business and also wants to get a good deal.
These peer-to-peer lenders/borrowers automatically match up the two. They do all the relevant credit checks do the complex job of matching up several lenders and borrowers simultaneously.
By cutting out the banks both Person A and Person B get a better rate. I’m oversimplifying the example somewhat (in reality your money is not being borrowed or lent to just one individual or business – it’s spread across several to minimise risk).
I think this is the future.
Most of us are fed up of being pushed and shoved around at the whim of governments, banks and corrupt lenders when it comes to our finances – and this is a very attractive alternative.
Here are the Insider’s Edge top 5 peer-to-peer lenders
A huge thank you to Insider’s Edge reader Michael for digging up a number of these.
Zopa – Perhaps the best known peer to peer financial marketplace – and has featured heavily on the BBC, Guardian and a number of other news outlets. On Zopa you can both borrow and lend.
Borrowers – can borrow any amount from £1,000 to £15,000. You can also repay early (saving interest) without penalty. Credit checks are performed on all borrowers.
Savers/Lenders – can opt for short or long term lending. Because of the way the peer-to-peer algorithms work you’re never lending to just one person – but smaller amounts to several individuals, which spreads risk. You set the rates – obviously the lower you go the faster you’ll get matched. Zopa take a 1% fee – which is how they make their money.
Thin Cats – “Business Loans Without Banks” is their tagline which is apt. They link investors with borrowers.
Borrowers – You need to be an established and profitable business for this one. If you tick all the boxes you can apply for loans of between £50k and £1million at fixed rates.
Savers/Lenders– can set their own interest rates and loan money out for periods between 6 months and 5 years. For the pension savvy you can even use your SIPP to lend (they provide a simple guide). They offer excellent rates – see the website for more details – and lenders can often get between 8% – 10%.
RateSetter – RateSetter is more of a consumer based peer-to-peer lender. As with all of these sites they match a lender’s savings to a borrower’s loan request and do all the necessary credit checks. They take a small fee from borrowers and lenders to cover their end of the bargain.
Borrowers – RateSetter do ‘soft credit searches’ which means that their quotes won’t hurt your credit score (multiple credit checks can have a negative impact on your rating). You can choose from fixed rate and variable loans and as with Zopa there are no early repayment penalties.
Savers/Lenders – They offer a ‘Provision Fund’ – which they state, and I quote, “offers protection: every RateSetter saver has received every penny”. Essentially they have a special fund set up to shield lenders from bad debt (late or missed payments) and to date it has a 100% track record.
Squirrl – Don’t be put off by the cartoon squirrel, this is a serious site set up for savers (it’s not for borrowers this one). Your savings go into funding loans for established businesses.
Savers/Lenders – Squirrl’s approach is a little different from some of the consumer orientated peer-to-peer lenders we’ve looked at, in that you’re not investing directly in individuals or businesses.
There’s a fairly convoluted explanation on their website but you’re effectively lending on the basis of providing funding for businesses who have secured reliable contracts. They quote an average rate for lenders of around 6%.
Funding Circle – Funding Circle is another peer-to-peer lender who’s featured some decent press coverage – on the BBC, the Financial Times and the Economist. This is another one for Savers/Lenders only – unless you have an established business and are looking to secure a loan.
Savers/Lenders – You manage your level of risk and as with most of these services instead of lending to just one business you’re spreading your risk to several credit checked businesses. They quote an average gross yield of 8.8%.
Good or bad we’ll no doubt be stuck with banks for a little while let, but peer-to-peer lending provides us with a genuine alternative which provide borrowers and lenders with a significantly better rate.
I’ve listed a selection of some of the more popular peer-to-peer lenders but if you’ve come across or used others please feel free to add a note in the comments below.
If you do use any of these do check all the terms, conditions and FAQs – just as you would if you’re investing your money in stocks, shares, a building society or a bank. All investments carry a level of risk.