The people's bank: peer-to-peer lenders

Sick of the big banks making huge profits from borrowers - while offering derisory incentives to savers? Now thousands of Britons are turning to a new kind of banking.

So-called peer-to-peer lending has never been more popular, with members of Britain’s biggest operator, Zopa, lending £125 million since its launch in 2005. Like speed-dating for your finances, this form of banking brings savers and lenders together online, cutting out the big banks. At Zopa, borrowers must pay a flat fee of £130, while lenders are charged one per cent on all cash they lend to online borrowers.

Despite this one-per-cent premium, lenders receive an average return far higher than most savings accounts offer them given today’s rates. Last year peer-to-peer lenders earned an average 8.1 per cent after they had paid administrative charges.

As with banks, peer-to-peer lenders still require borrowers to have a decent credit record. At Zopa, borrowers are given a risk rating: A*, A, B, C or young, with A*-rated borrowers having the highest credit scores and “young” having little or no debt repayment history.

But while the returns are much better, they are also riskier than via a bank. Peer-to-peer sites - Zopa rivals include Ratesetter.com, Fundingcircle.com (which works with small businesses not individuals), YES-secure.com and quakle.co.uk - are all unregulated. To minimise the risk, peer-to-peer banking encourages lenders to borrow from a range of individuals, so if they default, the financial hit is spread out. Most providers set a default of investors lending only £10 to any one individual.

But nonetheless, you need to be prepared to lose some or all of your investment if you lend to a borrower who defaults. The sites are not regulated by the Financial Services Authority, which means there is no access to the Financial Services Compensation Scheme, and there aren’t any available insurance policies.