However, these rates are not quite as attractive as they may seem on first glance. With the rate of inflation now at 6.7 per cent, even the highest-paying fixed term cash accounts are still unable to keep pace with the higher cost of living.
By contrast, peer-to-peer lending platforms such as Folk2Folk have been offering inflation-beating returns for many years. Folk2Folk’s interest rates start from 8.75 per cent, but according to Roy Warren (pictured), the platform’s managing director, some of its loans are currently paying 10 per cent or more.
Despite the higher returns offered by P2P lending, many savers and investors prefer to accept a lower rate of return in return for protection under the Financial Services Compensation Scheme (FSCS). This scheme protects consumer deposits up to the value of £85,000, and it is seen as a safety net to cautious savers who may have witnessed the chaos of the 2008 financial crisis, when several banking institutions failed overnight. The scheme only kicks in after a bank or building society has gone into administration.
“P2P is still an inflation-busting form of investment,” says Warren. “But it is a struggle for P2Ps at the moment because traditional deposit takers are offering rates that are tantalisingly higher than before.
“There’s a lot to be said for taking five per cent with the perceived safety net of the FSCS, but having said that you’ve still got good levels of protections around P2P, and there’s still quite a good margin between us. We’re seeing loans now consistently above 10 per cent and you won’t get that at any high street bank.”
While P2P platforms are not eligible for inclusion under the FSCS, the Financial Conduct Authority (FCA) requires platforms to have other protections in place to manage the same scenario. All P2P platforms authorised by the FCA are required to have a wind-down plan in place, in the event that the platform goes into administration.
“In the event of something happening to the platform, the wind-down provider would step in and continue to run the business and manage the loans,” explains Warren. “This plan should enable a continuation of business as usual, that is: investors receiving their monthly interest and a return of their capital at the end of the loan term.”
Furthermore, P2P loans typically come with a form of security. All of Folk2Folk’s loans are backed by UK property or land, with a maximum loan-to-value of 60 per cent, so in the case of a default the property or land can be sold to recoup the initial investment.
This means, should something happen to Folk2Folk, its wind-down service provider – RSM – will step in to take over the running of the loan book and in theory, the loans should run their course with payments made to investors as planned. And should something happen to an individual loan on the platform, the security can be sold with the proceeds going to the investors.
In an unpredictable economic environment, the benefit of inflation-beating returns with the reassurance of property as security and a wind-down plan in place, can help investors to manage their risk while earning an attractive return on their funds. As inflation remains stubbornly high and the economic recovery promises to be a long, slow process, consumers need to make informed choices when deciding where to put their money.
This article was initially published by Alternative Credit Investor on 12th October 2023 and can be viewed here.