In June 2012 the Government launched a scheme called Funding forLending, this basically incentivised the banks and building societies to lend by offering them access to cheap money from the Bank of England. This access meant that the banks were able to subsequently lower their rates and increase their lending.
The Effect on Savings Rates
While this scheme has certainly boosted the personal loan market it has had an adverse effect on other aspects of the financial services, such as savings accounts. With banks and building societies farming all their time into lending, their focus has remained well away from their savings meaning the rates have dropped badly with most accounts barely beating inflation.
Is it Worth Saving?
With rates being so poor, many are considering whether it’s even worth saving money or whether they should simply spend their spare cash. It shouldn’t be forgotten that having savings is the ultimate safeguard against financial problems which is why we always encourage it regardless of the rates. However, what if we were to say that you can still get rates of 5% interest and you don’t ever having to enter a bank?
Peer to Peer Lending
Peer to peer lending is a relatively new addition to the financial services which offers you the chance to earnup to and in excess of 5% interest on your savings. It works on the basis that you fund loans with your savings and then earn interest back as the loan is getting repaid by the borrower. The peer to peer company simply acts as a meeting place for lenders and borrowers, executes the deals and then charges a small fee for their service, however this fee is small which is why they are able to offer such attractive rates.
Accessing Your Savings
Having been approved as a lender you will then be given the option of whether you’d like to lend for up to 3 years or up to 5 years. By choosing the longer term you will get access to higher rates; however you will have to lock your money away for longer. Some of the larger lenders will give you the option to get quick access (often referred to as rapid return) to your money but this is likely to affect the rates you get.
What’s the Risk
You’re probably wondering what happens if the borrower fails to repay your money? Firstly, the Peer to Peer company will have a strict criteria regarding who the money gets lent to which means only those with a good credit history will be approved. Affordability checks will also be carried out to ensure that the borrower could afford their loan.
If however the borrower does fail to pay (maybe due to a loss of job or illness) then the company will have a safeguard in place to ensure that you always get your money back. So in answer to the original question; the risk is in fact very low.
Becoming a peer to peer lender is in fact very easy and is a great way of growing your savings. The great thing is you start an account with as little as £10 so you don’t need a large initial deposit like many of the fixed rate bonds offered by the banks.
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