An Alternative to poor savings returns

Roland08

I am suprised that there is no mention on MoneySavingExpert.com about P2P lending as an alternative to the pathetic savings rates currently offered by National Savings, banks and building societies. Best current mainstream savings rates seem to be about 3%; way below inflation and way below what is achievable on these alternatives. Effectively, everyone saving is having their capital eroded to refinance the banks.

Zopa, YES-Secure and Funding Circle offer an alternative. Apparently, Zopa have 1-2% of all UK personal loans. Funding Circle seem more orientated toward loans to businesses who are being quoted rediculous rates by the banks. Risk is graded using the same techniques as used by the mainstream lenders. An AAA rating being virtually risk free but offering the lowest rate of return however, rates between 7.5-8.5% are the norm. Even after tax (if applicable) nett returns are above inflation. Effectively, these organisations cut out the middleman; the banks.
Risk can be spread by allocating money in blocks. e.g. £500 split into ten £50 blocks. The lender has full control over where his money is allocated. The only other drawback is relinquishing the loan before repayment but there is a market within the website to cash in/exchange holdings if the lender needs or wants to exit early.

I can only guess the reason why these P2P companies are not mentioned in savers guides on this site is because of agreements between the banks and building societies and moneysavingexpert.com for pay per click traffic. I hope I am wrong about that.

Old_Wrinkly

'Tis a bit odd, since they include Zopa in their 'need a loan?' type articles, together with an income-generating '* link' to the Zopa site ...

jamesd

No

MSE sticks to guaranteed items and generally avoids articles on investments. Zopa and the other P2P investments are high risk unregulated investments and far from the sort of thing that MSE covers. The high risk aspect comes from things like:

1. No FSA regulation for investments.
2. No FSCS protection.
3. The party assigning the credit rating is also the one putting together the package of loans, selling the loan package and making an income that depends on the amount they sell.

Have a look at the UK lender that fired senior staff for ignoring underwriting criteria to get bonuses, the US mortgage market and the mortgage backed security market to see how badly 3 can blow up. All looks fine until it does.

Your own post illustrates another issue with Zopa and some other P2P lenders: comparison of a capital at risk investment with a risk free savings account as if they were the same. No surprise that you'd do it, it's the sort of thing that they encourage.

The P2P schemes don't cut out the middle men, they are the middle men. For being middle man Zopa takes something like 45% of the total cost of credit for a median size loan, a higher percentage than that if you allow for the fact that most loans are repaid early.

Zopa pays commission for referrals, including from comparison sites, and would surely pay MSE.

This doesn't mean that they are bad, just that they are high risk and not really what MSE covers. Loans are different because the borrower isn't placing their capital at risk.

It's not even a case of Zopa paying out more than other investments with lower risk. It's easy to beat.