Peer to Peer lending in the UK

UK banks are offering very low interest rates to savers because the UK Government is giving them free money and they do not need to attract money from ordinary savers. Last year a UK bank was offering 2.5% on a one year bond. Currently it is offering 1.3%. Both rates are below inflation so anybody who has savings is seeing them shrink in real terms.

Given that many people with savings are past or potential Conservative supporters Cameron and Co. don't seem to be following a policy which will increase their votes. Savers appreciate what the Government is doing to them and look forward to repaying the Conservatives in the future.

Given this situation there is increased interest in Peer to Peer saving. ZOPA, Ratesetter and Funding Circle are the three main UK companies claiming to allow ordinary savers to lend to borrowers without involving a bank. They claim that their main advantage is that they pay higher rates of interest than the banks. Their disadvantage is that deposits with them are not guaranteed by the Government. That means you are risking up to 100% of your money for an extra 2-3% interest.

ZOPA used to look quite interesting [at least for a small punt]. When you gave ZOPA your money you could decide how much risk you were willing to take. The riskier borrowers paid an higher return. You take part in the lending decision. Now you cannot and ZOPA has become very dull. You just give them your money for 3 or 5 years and collect your interest. You have no chance to say who is lent your money and at what level of risk. ZOPA keeps all the decisions to themselves. That does not suit me at all. If I am taking a risk I want to decide how much risk. I want to be involved and interested.

They are also tediously bureaucratic. When I tried to open an account I got this response.

To continue creating your account, we simply need you to provide us with:

1    A utility bill OR bank statement.  This must be an original, not a copy, and less than 3 months old.

2    A copy of your passport OR photo driving licence.  This must be verified by a professional person, eg. an accountant, solicitor, nurse, teacher, officer of the Armed Services. This person cannot be a family member, live at your residence, or be retired. 
Please ask them to: Write 'I certify this is a true copy of the original shown to me today' on the back of your passport/driving licence.  
Print their name, profession, address and phone number of the company/practice/employer for whom they work, using an official stamp if available.
Sign and date it.

'We simply' ?  That sounds like a lot of trouble for a dull but risky investment and a couple of extra percentage points interest. I do not think I will bother. 

I have not tried Ratesetter but this article suggests it is pretty much the same deal. Both ZOPA and Ratesetter lend to Joe Public.

Funding Circle is different. They lend to small businesses. This is something the banks are neglecting but the Government is very keen on promoting. So much so that they have given Funding Circle £20 million to lend. Funding Circle is also much more fun and gives lenders the chance to decide which borrowers they want to lend to. Or, a lender can use a tool which splits your money up and lends it to a wide range of borrowers. TO start with I decided to use the tool and lend to 100 different borrowers.

Borrowers are graded from higher risk to lower risk and you can choose which ones you want to go with.

I have tried a small investment with Funding Circle. If it goes well I shall increase my investment.

Watch out for future reports on my adventures in business lending.