If you are after a fantastic savings rate forget the banks, or at least that is what I am doing. Poor interest rates, teaser rates that finish after a year, prolonged lock in periods or top deals reserved for those customers who are willing to switch their current accounts. It all results in a great deal of frustration as far as I am concerned.
So I have turned away from the banks and now regularly save with peer to peer lenders that do offer a fantastic rate and also make you feel quite good about saving.
It works by a company bringing together lenders and borrowers so that the lenders can loan borrowers money. The borrower obtains a loan at a great rate and the lender earns a fantastic rate of interest on the money that they have loaned. The great thing here is that the banks are removed from the process. By far the most well known site is Zopa who lend money to private individuals. But other sites exist. My particular favourite and one that I save with regularly is Funding Circle a site which allows lenders to loan money to small companies.
The benefit of peer to peer lending is that you can choose who to lend to and the level of risk that you are willing to take on the money that you loan. Don't forget that, as with banks, if you lend money to an individual or company through these sites there is a risk that the borrower will not be able to repay the loan. To take this into account the peer to peer sites will grade a loan and give it a risk rating so for example A* for low risk and C for high risk. Generally the better the risk rating i.e. A*, the less likely the borrower is to default but also the lower the interest that you will earn on your money. Based on these risk ratings you must judge how much risk you are willing to take with your money, if you want the higher rates of interest then your appetite for risk must be greater. You can get as involved in the process of lending as you want either choosing every single borrower that you lend to or by setting up an automated lending function which lends your money out when you have the funds available. Typically you are locked into lending to a borrower for a fixed period of time which can be up to five years but if you need your money at any time you can choose to sell your loan parts to other lenders.
The rate of interest that you can earn varies but for Zopa the average interest lenders earn is currently 6.8%, for Funding Circle this figure is 8.4% which is significantly better than your High Street Bank! But please be careful. Fully understand the risks involved, peer to peer lenders do not have to be regulated by the Financial Services Authority and are not covered by the savings protection scheme. If a borrower does default on the loan the peer to peer lender will try and recover your money but there are no guarantees that you will get it back.
As with anything that involves your money read fully the details that the peer to peer lending companies provide. Check on the level of defaults for the loan book that the company manages and if in doubt seek independent financial advice.
Below are links to some useful sites.
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