Zopa launches 5% Rate Promise for savers

The peer-to-peer platform is guaranteeing to pay a fixed return to investors, even if it means taking the money from its own pocket.

Today is the last chance to take advantage of Zopa's  Rate Promise for investors.

The peer-to-peer platform is offering an average 5% return for up to five years, or 4.1% for up to three years, on any monies investors lend before 3rd February.

Zopa’s 1% Annual Lender Fee is already factored into these rates.

However, for lenders that invested before August 2008, the Rate Promise will guarantee a higher return of 5.5% over five years or 4.6% over three, as they are only subject to a 0.5% fee. Meanwhile, so-called founding lenders, who joined the platform early now, pay no fee so will be guaranteed 6% over five years or 5.1% over three.

This is the first offer of its kind from Zopa, but how does it work?

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How the Rate Promise works

Investments can start from as little as £10.

Zopa will lend out your money on your behalf during an offer period in small chunks to different borrowers at varying rates.

Some will be lent above the promised rate, some will be lent at the same rate and some will be below.

However, the Rate Promise ensures that all the money lent within the offer period earns an average of 5% (or 5.5% or 6% depending on your status) over the lifetime of the loans.

For a peer-to-peer platform that’s a pretty bold promise, as rates are normally variable and track the daily ups and downs across the market.

Zopa intends to guarantee the Rate Promise by reviewing the average return each month for the eligible loans in the preceding months. If the average return is found to be lower than the promotional return of 5% (or 5.5% or 6%), Zopa will offer up part of the applicable Annual Lender Fee to cover the shortfall.

If the Annual Lender Fee doesn’t cover the shortfall between the average return and the promised promotional rate Zopa will step in to credit the difference out of its own funds.

So the Rate Promise works almost like a fixed rate bond, but with added flexibility as investors can sell on their loans (subject to a 1% fee) to get their money back through Zopa’s Rapid Return Facility.

However, there are is a major difference to be aware of when using peer-to-peer platforms over a bank or building society.

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Understanding peer-to-peer

Peer-to-peer platforms like Zopa act as financial matchmakers.

They link savers willing to lend money directly with borrowers in need of credit, cutting out banks and building societies to offer each side a better deal.

These mutually beneficial relationships have become popular over the last few years as an alternative to traditional banks, where lending has dried up and savings rates have nosedived. Zopa has facilitated over £447 million of lending since 2005.

However, investments made through peer-to-peer platforms like Zopa aren’t covered by the Financial Services Compensation Scheme, which guarantees up to £85,000 worth of deposits.

So investments aren't protected in the same way as a traditional savings account.

That said Zopa has a Safeguard facility which can step in if a borrower defaults. The pot currently stands at over £2 million and can be used to give investors their money back plus any interest owed after bad debt.

Zopa keeps its default rate low by only lending to creditworthy people and breaking up investments into smaller chunks. Historical bad debt since 2010 stands at 0.21%, which it says is less than some banks.

How Zopa’s deal compares

With peer-to-peer investments returns aren’t normally guaranteed and there is a risk you could lose some money.

But Zopa seems to be working against these caveats, with its new Rate Promise and its established Safeguard fund. With these features it’s easier to compare Zopa's new deal with those on offer from banks and building societies.

At the moment, FirstSave and United Bank UK offer the top five-year fixed rate bond rate at 3.25%. Leeds BS offers the highest paying Cash ISA with a five-year fixed rate deal of 3.05%.

Those rates are notanywhere close to what Zopa can offer investors, although the ISA return is, of course, tax free.

However, another peer-to-peer platform – RateSetter – has a better 5.9% rate on offer over a five-year term at the moment. That said it doesn’t carry the same rate guarantee as Zopa, though it also has something called a Provision Fund to protect investors from bad debt.

The only high street cash account which matches the 5% Zopa return right now is a current account.

The Nationwide FlexDirect account pays 5% in-credit interest, but it only applies to balances of up to £2,500 and is only paid for the first year. The account offers easy access, but you need to pay in £1,000 a month to qualify for the interest.

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More on peer-to-peer:

Peer-to-peer lending set to be regulated

LendInvest: the first peer-to-peer mortgage lender

Buy a mobile phone from giffgaff with a peer-to-peer loan from RateSetter

TrustBuddy: peer-to-peer lender offering 12% returns opens up to UK investors