Peer to Peer Saving Accounts

All you need to know about peer to peer savings accounts

P2P Saving Accounts

When you want to generate returns on your savings, you want the best rates possible. Unfortunately, interest rates are currently very low which makes saving accounts unappealing. As a result, many people are looking for better ways to generate interest, such as peer to peer savings accounts. However, with the potential benefit, also comes a degree of risk.

What is a peer to peer savings account?

Peer to peer savings accounts matches savers with people or businesses that want to borrow money. The service cuts out banks as the middle man which means that borrowers generally get lower rates than banks and investors receive improved interest rates. There is still a middle-man, which is a platform provider which matches borrowers and savers and they will take a fee.

Savers can put money aside for as long as they want and with peer to peer lending, they can generate a reasonable return. Some providers will offer attractive rates as high as 7.2%.

With peer to peer savings accounts, your money is at risk. Your borrower may default on the loan and cannot pay the money back. This means you could lose a substantial sum of money. However, peer to peer platforms will put the necessary safety measures in place to reduce the risk. The platform will run credit checks on the borrower and will only lend to those they are happy with. Furthermore, they will chase the debt on your behalf.

Peer to peer savings accounts are suited to those who want to save, have minimal debts and can afford to lose the amount they invest.

It is important to state that most peer to peer savings accounts do not have coverage from the Financial Services Compensation Scheme (FSCS). The FSCS is a product that protects traditional bank savers for up to £75,000.

Requirements of a peer to peer savings accounts

Different peer to peer platforms will have different requirements for their lenders and will often impose minimum and maximum limits for how much you can lend. For example, Zopa and Funding Circle requires a minimum investment of £1,000, but the maximum amount is unlimited. Ratesetter for example has a minimum lend amount of £10.

One of the requirements of peer to peer savings account is that it is currently taxable as it is seen as income. This means you will need to tell the HMRC of how much interest you earn from peer to peer lending. For basic rate taxpayers, you can earn up to £1,000 in interest tax-free. Higher-rate taxpayers can earn £500 in interest without paying tax.

Another option is to use a peer to peer lending platform that offers the innovative finance ISA. This allows you to set up an ISA as an individual platform, so interest generated is tax-free. However, there is a limit on how much you can invest into ISAs. The current limit is £20,000 tax-free, and this could be split among a range of ISAs or focused in one ISA such as an innovative finance ISA.

The advantages of peer to peer savings accounts

• Higher returns compared to regular savings accounts
• Opportunity to help people and businesses
• Some providers offer their own compensation scheme to protect you from failed repayments
• You can invest through an innovative finance ISA which is tax-free with investment up to £20,000
• The offer of variable and fixed interest, depending on the provider
• You have the option to sell your investment to another provider
• The Financial Conduct Authority regulates the peer to peer industry

The disadvantages of peer to peer savings accounts

• Could lose some or all of your money if the borrower cannot pay you back
• You have to complete a self-assessment tax return unless you invest in an innovative finance ISA
• It is not guaranteed that you will have a borrower, so you will not earn interest until you have borrowers
• You can set the bid for borrowers to accept, but another investor could undercut you.
• You can only withdraw money at the end of the term unless you sell the investment to another provider.

If you want to invest in a peer to peer savings account, then it is essential to research all of the providers. You will first need to find the providers who will accept you and the amount you are willing to invest.

Afterwards, you will then need to compare the offers available. You will need to check how they protect your money as well as the expected return. It is also important to understand how popular they are; many will state how much money has been borrowed and the number of defaults so that you can see their success rate.