Why I've started saving with RateSetter
In the hunt for a decent rate of interest, I've turned to peer-to-peer lenders, starting with RateSetter.
It’s a depressing time to be a saver. My wife and I are saving a few pounds each month at the moment, knowing that we need a more secure safety net in place. Plus, if we ever want to upsize our home, we’ll need a decent deposit to do so.
But finding a home for that money, that will pay a decent rate of interest, is not exactly an inspiring experience.
That’s why I’ve decided to experiment with peer-to-peer lending. It’s something we’ve written about a lot in the past, but there’s a difference between writing about it and actually taking the plunge. So I’m putting £50 into RateSetter to see how I get on, and then report back.
How peer-to-peer lending works
Peer-to-peer lending, or social lending, basically cuts out the banks. Ordinarily, you save money with your bank or building society, and they then use your savings to fund the loans they offer to other people.
But with social lending, you lend your cash directly to borrowers. Some sites allow you to choose exactly who you want to lend to, offering you details on what they want to use the money for. Others allow you to lend to businesses rather than individuals, meaning you can give the economy a helping hand.
The trouble is that this is really a form of investment rather than saving, since the borrowers may default on the loan, leaving you out of pocket. There’s also the absence of regulation or the safety net of the Financial Services Compensation Scheme to consider.
Which peer-to-peer lender to go for?
I wanted my money to go to individuals rather than businesses, so that ruled Funding Circle out. So, why choose RateSetter over the bigger name of Zopa?
The first was the lending options at my disposal. With RateSetter you can lend over four different terms: monthly, one year, three years and five years. With Zopa you can choose to lend over Shorter terms (two to three years) or Longer terms (four to five years).
Given that this is just an experiment with a small amount of money, I feel much more comfortable going with the monthly access loan. My money is lent for one month, at the end of which I can roll the contract over or withdraw the money if I want to. It’s essentially a 30-day notice account. And I’m getting a rate of 3.6% on my money, which isn’t too bad in the current climate.
And then there’s the Provision Fund. This is the main way that RateSetter promises to protect its lenders from missing out should their borrowers fall behind on payments. It’s a simple idea really – part of the cash that borrowers pay in order to get their hands on a loan goes into the fund, which can then be accessed should there be a late payment or default.
It’s not perfect and is no guarantee – after all there’s only £560,000 in the fund, compared to nearly £20 million being lent. But the fact that RateSetter has so explicitly outlined a contingency plan for its savers is somewhat reassuring.
My money was immediately matched with a borrower – I opted to go for a rate which meant it would be lent straight away, rather than hold out for an extra 0.1% or so. So now I wait. Up to now, the whole process has been incredibly smooth. I plan to do the same with Zopa and Funding Circle later this year to get a fuller image of just what social lending – or saving in my case – is like in practice.
What about you? Would you ever save or borrow through a site like this? Let me know what you think in the comment box below.
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