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Peer-to-peer lending starts to gain interest

To beat inflation at 2%, basic rate taxpayers need to earn at least 2.5% on their savings - a rate offered only on fixed-rate bonds locking cash up for at least three years.

Higher-rate taxpayers need to earn at least 3.3%, and only three savings accounts currently achieve the latter, all of them fixed for five years or more.

So it is no wonder many savers have turned to the new kids on the block - websites which match savers with borrowers, cutting out the banks. Step forward P2P (peer-to-peer) lending and crowdfunding, which offers loans to individuals and businesses from savers at rates which are attractive to both. Last week it emerged that P2P lending rose by 121% last year over 2012.

The Government, keen to promote alternative lenders to the banks, has tightened up controls on the sector, possibly as a precursor to allowing P2P accounts to roll up interest tax-free within an Individual Savings Account. The Chancellor could launch a consultation in his March Budget.

Stuart Law, founder and chief executive of Assetz Capital, one of the UK's fastest-growing P2P lenders, said: "The Government must act to improve the current ISA offering. Investors are currently forced to choose between sub-inflation returns on cash ISAs or the volatility of stocks and shares."

P2P market leader Zopa stresses that it spreads the risk by lending savers' cash in small chunks to many borrowers. Its most recent offer was a guaranteed average 5% return for those prepared to wait five years, or 4.1% over three years.

Chief executive Giles Andrews says: "Despite Zopa's default rate being extremely low [0.8% on all money lent since launch], the Zopa Safeguard is available to make up all the money owed from a borrower, including the interest, in the rare instance that they are unable to pay back their loan."

Elsewhere, Ratesetter was recently paying 4.1% for income over five years, 2.7% over three years, 3.1% for a one-year bond and 2% for monthly access. Ratesetter has a Provision Fund which it says has met all claims.

Funding Circle is the third big player in the loan crowdfunding market, which will come under direct control of the Financial Conduct Authority in April.

The P2P sites only accept around 12 in every 100 loan applicants, which means their default rate is only around 1%. But savers can earn higher rates for lending to riskier borrowers. Lending to B-rated rather than A-rated borrowers may not jeopardise your cash, but it might mean less predictable repayments.

Last month saw the launch of a new P2P player, Lending Works, which claims its safeguard is the most comprehensive yet, with rates of about 3.5% over one year and 5.1% over five years.

Small savers can also lend to the small business sector, through investment crowdfunding. Arran Brewery, for instance, is currently seeking £4 million from investors for its expansion plans, following the pioneering success of craft brewer BrewDog. Investors are typically offered incentives and perks related to the business, in Arran's case discount vouchers on brewery visits, merchandise, and hotel or bistro custom, as well as educational events and "an opportunity to be trained in beer tasting".

Last week saw the launch of a new Scottish crowdfunding platform, ShareIn, focused on young technology and healthcare companies, with a minimum investment of £10. It said: "In addition to the potential future reward that can be gained by owning shares in a start-up company, UK Government tax breaks can reduce investment risk by more than 70%."

However, the Financial Conduct Authority has warned: "We believe most crowdfunding should be targeted at investors who know how to value a start-up business, and who appreciate the risks involved and that they could lose all of their money."

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