Zopa, the UK’s leading peer-to-peer (P2P) site, has today announced it has created a ‘safeguard’ to pay out to lenders even if a borrower defaults on the money owed.
Peer-to-peer lending, also known as social lending, websites match up savers who are willing to lend with people looking to borrow. You get a higher rate of interest than you’d get from your bank, but the downside is they come with greater risk and lower protection.
In a bid to give savers added peace of mind that they will get a return on their investment, Zopa claims its new Safeguard tool will make up the money owed from a borrower if they are not able to pay back their loan. It will limit returns on savers’ investments to about 5% net, that is still about 2% better than the current Best Rate cash Isas and Best Rate savings accounts that don’t require minimum monthly deposits. Zopa savers will still be able to lend at higher rates if they want to, but any money that is will not be covered by the new Safeguard.
What are the risks of peer-to-peer lending?
The higher interest rates of peer-to-peer lending mean more risk. It should not be considered as an option for all your savings, but only as part of a balanced investment portfolio. While many peer-to-peer lenders have ways of containing the impact on lenders if borrowers default, such as spreading each investor’s money between numerous borrowers, it’s worth remembering that peer-to-peer sites are not covered by the Financial Services Compensation Scheme.
They are licensed by the Office of Fair Trading for lending activities, but with peer-to-peer lending you don’t have any statutory rights, nor can lenders complain to the Financial Ombudsman Service. But that could all change under plans to regulate the industry from April 2014 under the scope of the Financial Conduct Authority.
Find out more about peer-to-peer lending.
The Zopa Safeguard in detail
Each P2P site has slightly different ways of trying to minimise risk to savers. Despite Zopa’s default rate on all of the money it has lent over the last eight years sitting at just 0.8%, the P2P site’s new Safeguard tool is aimed at reassuring savers that their money is better protected.
Similar to RateSetter’s Provisional Fund, the Zopa Safeguard, a pot of cash held in trust, is designed to pay out to lenders even if a borrower cannot pay back their part of the loan.
If for any reason the Safeguard did run short of money, savers will be given a proportion of the amount owed rather than the whole amount until funds are built up again. If the money does run out and the Safeguard is unable to give savers any payment, lenders will be put in a queue along with other creditors.