Money Insider: Peer-to-peer lending shows some longevity

Many people doubted whether peer-to-peer lending would ever really take off, but it appears that the sector is going from strength to strength and increasingly being accepted as a credible alternative to the banks.

Compared with mainstream banking this new breed of finance is still in its infancy. Zopa, the UK's first peer-to-peer lender, celebrated its seventh birthday last month.

A lack of confidence in the UK banking sector since the credit crisis, combined with high borrowing rates and low savings returns, has helped the peer-to-peer market flourish, with new providers entering the industry in the past couple of years.

Zopa remains by far the biggest player and to date has arranged more than £185m in loans, including a monthly record of £8.2m in January alone.

A more recent arrival on the peer-to-peer scene, acting as the go-between for individual savers and borrowers, is Ratesetter, launched in October 2010. To date it has already provided more than £18m in loans.

Along with Zopa and Funding Circle, Ratesetter formed the Peer2Peer Finance Association, a UK trade body set up to ensure that the sector maintains high minimum standards of protection for consumers and small business customers.

The peer-to-peer market is not solely aimed at personal customers, and with banks tightening credit policy and reportedly more reluctant to lend to SMEs, we've seen the emergence of a new breed of business lenders including Funding Circle and Crowdcube.

Funding Circle has lent more than £25m to businesses since it launched in 2010, with the average loan at around £40,000. The company pools the savings of investors, who have enjoyed average returns in excess of 8 per cent, while the current bad debt ratio is just 0.3 per cent. Another newcomer, Crowdcube has already secured more than £2.5m of funding for new businesses just starting out.

Potential borrowers shouldn't see this alternative banking concept as a soft touch, as strict credit scoring criteria are absolutely vital to ensure defaults are kept to a minimum, to give people confidence to continue to deposit their savings with the peer-to-peer companies.

Ratesetter, for example, recently said it approved only 10-15 per cent of loan applications, so while it may offer a simpler and fairer way to borrow money, if you don't have an excellent credit profile you're going to have to seek your finance elsewhere.

One of the main concerns among people depositing their cash with peer-to-peer providers is that although the returns far outweigh those paid by the banks, they don't offer the cast-iron guarantee to savers that bank customers enjoy under the Financial Services Compensation Scheme.

Even though tough credit scoring criteria are in place, there is still an element of risk, albeit small, that you don't have with a bank or building society. As long as you understand and are comfortable with this, lower overheads of not having to run a nationwide network of branches means you can obtain better returns on your cash in the peer-to-peer market.

Providers have their own methods of trying to mitigate the risk to depositors. Zopa, for example, will spread your money among a wide range of borrowers, while Ratesetter has a "provision fund" built up from borrower fees and used to reimburse lenders in the case of late payment or default.

The more established this market becomes, the more confidence consumers will have, and if providers continue to keep rates competitive and bad debt levels low, the peer-to-peer industry could soon play a much bigger role in the UK personal finance market.

Isa best buys for the new tax year

There's been a flurry of activity in the ISA market over the last couple of weeks with rates being tweaked and products relaunched as we moved from one tax year to another. Now the dust has settled here are some the best deals around if you're still deciding on where to put your tax free savings.

If you are not worried about transferring existing ISA balances then take a look at Cheshire BS and AA savings, both paying a market leading instant access rate of 3.5 per cent.

Both accounts include introductory bonuses, so make a note to switch again next April.

If you've got existing ISA money to move, take a look at Santander at 3.3 per cent with instant access, Aldermore at 3.15 per cent with 60 days notice for withdrawals or a one year fixed rate from Santander paying 3.5 per cent.

There are higher rates available if you're prepared to lock your cash away for terms of between two and five years, but which ever account you opt for these best buy deals may well not be around this time next month, so grab them while you can.

Andrew Hagger – Moneynet.co.uk