Forget investing in an Isa, try lending to a total stranger

HAVE low interest rates finally driven us mad? Thousands of people are lending money to complete strangers over the internet through social lending sites.

The concept is quite frankly cool. Lenders and borrowers deal directly with each other, borrowers get lower rates and lenders get higher returns. It’s becoming a big business. Zopa – the oldest fish in the social lending pond – has arranged more than £125m worth of loans in its six-year existence. But the question nagging is: can it be safe?

Kevin Mountford, head of banking at moneysupermarket.com says: “It’s important to remember that anyone using this kind of service is exposing themselves to more risk and has far less protection than someone depositing their money in a bank or building society.” None of the money lent through the schemes is protected by the Financial Services Compensation Scheme, so the depositor could lose some or all of their investment if the borrowers default or the firm goes bust. But it is so far so good on this front. No firms have gone bust and only 0.7 per cent of Zopa’s investments haven’t been repaid, and RateSetter hasn’t had any yet – and their “provision fund” covers bad debts.

There are ways to play it safe without losing out. Our first nugget of advice is: do your research. There are at least five major sites available – Funding Circle, Quakle, Ratesetter, Yes-secure and Zopa – all with slightly different offerings. Secondly, spread your bets. No matter how creditworthy your investment choices, there is always a chance they might default. If you spread your cash as thinly as possible, across 20 or 50 people potentially, you are less likely to lose your initial capital. Finally, don’t be tempted to just go for the highest rate. Playing the rate tart in this game means you expose yourself to much higher risk. Happy banking without the bank.

TOP THREE SOCIAL LENDING SITES

Zopa (www.zopa.com)
Screens all potential borrowers, looking not only at their credit history but at affordability factors too.

RateSetter (www.ratesetter.com)
RateSetter has a “provision fund” to cover bad debts. This is paid for by the borrowers, through an additional rate charge.

Funding Circle (www.fundingcircle.com)
The money here is lent to low-risk small businesses, rather than individuals.