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29 Jan 2014

With Fewer New ISAs, Savers Could Turn To P2P Lending

So far in January, only 27 new ISAs have been launched by banks, a figure significantly lower than that for December 2012, when there were 73 new ISAs for savers to choose from. The figures look especially bad since this is the peak of the ISA season when banks should be doing their best to attract new clients. This could turn savers´ attention to peer-to-peer lending options as an alternative savings choice, writes Chiara Cavaglieri for the Independent.

Peer-to-peer online platforms aim to bring together people who need a loan and people looking to get some return on their savings by lending to the former. One such platform, Zopa, offers lenders an average return of 5% over a period of five years, and a 4.1% return over a period of three years for loans made by 3 February. Another P2P lending platform, Ratesetter, offers returns of 3% over one year, 4% over three years and 5.7% over five years. These returns are calculated after fees for the platform (1% for Zopa and 10% of the interest for Ratesetter) and bad debt, but before tax. The figures are much more attractive than the returns on cash ISAs, which range from 1.26% for easy-access ISAs to 2.75% for five-year accounts

The major risk that P2P lending carries is that it is not backed by the government´s Financial Services Compensation Scheme, which guarantees sums of up to £85,000 in case the bank fails. Also, the interest earned from P2P lending is taxable, and if a lender needs to get their money out earlier, they may have to pay a transfer fee.

Due to the growth of the P2P market, the Financial Services Authority will be stepping in to regulate it in April this year. Also, P2P products may start to be included in ISAs, which could make the latter more attractive.

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