Why Can’t Peer-to-Peer Lending Accounts Offer Cash ISAs?

Written by Karen Bryan

UK coinsWith the current low rates of interest being paid on savings accounts at traditional institutions such as banks and building societies making it hard to even maintain the value of your savings, fixed rates of 3.55% for one year and 5.0% for three years with the peer-to-peer lending company RateSetter look pretty alluring. The highest rates I could find for a standard fixed rate savings account was 2.25% for one year with Virgin Money and 2.95% for three years with FirstSave.

One of the negatives is that peer to peer lending isn’t covered by the Financial Services Compension Scheme (FSCS). Under the FSCS your savings up to value fo £85,00o are fully protected. With peer-to-peer lending, there’s the possbility of losing your cash.

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RateSetter have gone some way to addressing this issue with their Provision Fund, which aims to protect lenders from bad debt losses. Unfortunately, the Provision Fund doesn’t offer any cast iron guarantees, just that it is managed in the interests of lenders and that, so far, RateSetter have repaid all capital and interest to lenders.

The other thing I’d like to see on offer from peer to peer lending sites is tax free Cash ISA accounts. I’ve already argued the case for tax free Cash ISAs to be available on any savings account. While the RateSetter one year bond paying 3.5% sounds good, basic rate tax payers would end up receiving only 2.8% after paying 20% tax on their interest.

The one year RateSetter peer to peer bond isn’t really looking like such a good deal. You can currently get 2.8% interest tax free (guaranteed until 31 December 2013) in the Coventry 60 Day Notice ISA which has full FSCS cover.

The three year account with RateSetter at 5% gross (4% after paying basic rate income tax) looks a bit more attractive; the highest rate I could find on a three year fixed rate Cash ISA was 2.8% with BM Savings.

Would I risk putting our savings into the RateSetter three year fixed rate bond for an additional 1.2% in interest? It’s hard for me to answer that. At present, most of our savings are in fixed rate accounts which will mature next year. I’ll probably compare the rates of interest on offer at banks versus peer-to-peer lending at that time. If we can earn significantly more in a peer-to-peer account, I’ll be tempted.

Interest rates correct on 2 February 2013