Lending out your savings to your peers might not seem like an obvious way of investing, but social lending is becoming increasingly popular. It's no surprise when you consider that sites like Zopa offered an average return of 8.1%* between September 2008 and August 2009, while at the same time, interest rates on traditional savings accounts fell dramatically.
Read on to find out how Zopa and other social lending sites work and why they could prove to be a great investment for your money.
How does Zopa work?
Zopa and other social lending sites are based on a community of people who lend and borrow money between themselves, rather than going to banks and building societies to get a savings account or a loan.
Social lending can be a win-win solution for lenders and borrowers, who may both be able to find better rates than they might get elsewhere.
Is it safe to invest in social lending?
Like all investments, social lending does have an element of risk. Investing in Zopa is not like putting your money into a savings account - there is no 100% guarantee that you will get your original investment back. As always, the opportunity for a higher return on your money goes hand in hand with greater risk.
Also, any money you invest in Zopa will not have the savings protection the FSCS provides for money held in savings accounts with banks and building societies.
However, Zopa itself takes a number of steps to make sure that your investment is safe. All potential borrowers are credit checked and risk-assessed before you can lend to them. Zopa reports that to date, lenders have experienced just 0.28% bad debt on all money lent. The site also gives you an estimate of the bad debt you're likely to experience, so you can take it into account before you make any decisions.
The money you lend is spread across a number of borrowers to minimise the risk of bad debt, so for example if you were to lend over £500, your money would be spread across 50 different borrowers.
Zopa also has protection in place for your money in the unlikely event that it were to go out of business - Zopa is not involved in the contracts you have with borrowers, so they remain legally binding and repayments still have to be made.
How can I invest my money with Zopa?
Investing with Zopa is simple - you can lend anything from £10 to over £25,000, and you decide what rate you want to lend at and the period you want to lend over (either 3 or 5 years).
You can also decide who you want to lend to - you pick the type of borrower you are happy with, based on their level of risk as assessed by Zopa. Zopa then matches offers of lending to requests from borrowers and oversees the loan agreement and repayments for you. Find out more about investing with Zopa.
What return can I expect if I invest with Zopa?
As a guideline, over the last 12 months lenders have got an average rate of 8.1% (after fees and before bad debt)* on their investment - which is a great return, particularly when you compare it to the average rate of 0.64% AER offered by instant access savings accounts in April 2009. However, as previously mentioned, this is an investment - there is no guarantee you will get your original capital back in its entirety, which is guaranteed in most instances with a savings account.
The return you may get is also determined by who you decide to lend to, so this figure could vary. The different risk categories of borrowers have different rates, so if you choose to lend to someone who is classed as being a less reliable borrower, you will get a better rate on the money you invest in return for the extra risk.
Find out more and start investing with Zopa today.
*Figure correct as of 20.9.09.