Beat the bank's lousy rates
Banks no longer have a monopoly on our personal finances. Starved of any yield from their savings, consumers are now looking to social lending websites as an alternative way to boost returns on their cash.
These sites are essentially online loan markets, connecting people who want to borrow from and lend to each other.
For many people, peer-to-peer site Zopa is now a recognised name on the market, although in a recent Moneywise poll, 48% of respondents said they hadn't heard of Zopa and only 10% had used it. However, that's set to change as new social lending sites hit the savings landscape.
YES-secure launched back in June, while the newest kid on the block, RateSetter, launched in October.
All three sites are based on the same premise - to enable users to borrow and save money without the middleman. Zopa is the classic peer-to-peer lending site; YES-secure incorporates social networking, so users can invite and chat to 'connections'; while RateSetter matches users based on a mutually agreed interest rate.
A promising start
The evidence of their success speaks for itself. Since its launch, RateSetter has lent over £600,000 to borrowers, and more than 1,500 customers have registered with the site in just over a month - proof that consumers are turning their backs on traditional saving and borrowing vehicles.
The increase in popularity can be attributed to the high rates of return. Over the last 12 months, Zopa boasts an average return of 8.1% before tax. When you compare this to an average return from a savings account of 0.79%, according to Moneyfacts, social lending starts to look much more attractive.
"Whether you're a saver or a borrower, social lending offers savers better returns and borrowers cheaper loans," says Rhydian Lewis, CEO of RateSetter.
It's worth pointing out though that social lending comes with a risk - if one of your borrowers fail to pay back their loan you could find yourself out of pocket.
"The industry is generally well-perceived, but the amounts lent across the industry are still small when compared with the banks.
"However, with interest rates at an all-time low, this is a fantastic opportunity for social lending to fill the void," Lewis adds.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The name given to a certain type of financial transaction which takes place directly between individuals or “peers” without the use of a traditional financial institution such as a bank. Various social lending websites incorporate a number of strong risk controls, and screen all potential borrowers by checking their credit history. Lenders agree to lend a specific amount for a stated return and lenders’ cash is pooled between borrowers, spreading the risk. The major social lending companies are Zopa, RateSetter, Funding Circle, Quakle and Yes-Secure.