Zopa launches new 4.9% Rate Promise for savers

The peer-to-peer platform is guaranteeing to pay a healthy fixed return to investors again, but only for a limited period.

Zopa has launched a brand new Rate Promise for investors.

The peer-to-peer platform is offering guaranteeing a 4.9% return for up to five years, or 3.9% for up to three years, on any monies investors lent before 17th February.

These rates already factor in Zopa’s 1% Annual Lender Fee. But if an investor is a founding member or joined before August 2008 they are subject to lower fees so can get a higher guaranteed rate.

For those that joined before August 2008 the Annual Lender Fee is 0.5%, so the Rate Promise works out slightly higher at 5.4% over five years or 4.4% over three. So-called founding lenders who joined at the begining don’t have to pay a fee anymore, so the Rate Promise equates to 5.9% over five years or 4.9% over three.

The Rate Promise - which is only the second Zopa has offered - is quite unique when it comes to peer-to-peer savings, as rates aren’t usually guaranteed and can flip-flop day to day. So how does it work?

How the Rate Promise works

You can invest from as little as £10 to take advantage of Zopa's Rate Promise.

Zopa will lend out the money you put in on your behalf during the offer period (between now and 17th February) in small chunks to different types of borrowers at varying rates.

So some of your cash will be lent above the promised 4.9% rate, some will be lent at the same rate and some will be lent below the promised rate.

However, the Rate Promise ensures that all the money lent within the offer period earns an average of 4.9% (or 5.4% or 5.9% depending on your lender 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.

So how does Zopa plan to keep its side of the deal?

How Zopa will keep its promise

Zopa’s Rate Promise centres on the Annual Lender Fee that investors automatically have to pay.

Zopa will stick to its Rate Promise by reviewing the average return eligible loans have made each month and using the Annual Lender Fee to balance out any underperformance.

So if the average return is found to be lower than the promised 4.9% (or 5.4% or 5.9% depending on the lender's length of membership), Zopa will offer up part of the applicable Annual Lender Fee to cover the shortfall.

And if the Annual Lender Fee doesn’t cover what’s missing, 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 their loans on (for a 1% fee) to get their money back through something called the Rapid Return Facility.

However, there is a significant difference to be aware of when using a peer-to-peer platform over a bank or building society to invest your money.

Compare returns from peer-to-peer companies

Getting to grips with peer-to-peer

Peer-to-peer platforms like Zopa link ordinary savers willing to lend money directly to borrowers in need of credit, cutting out the banks and building societies to offer each side a better deal.

These mutually beneficial relationships have grown in popularity over the last few years as lending has dried up and savings rates have nosedived at traditional institutions.

However, investments made using these increasingly popular social lending websites aren’t covered by the Financial Services Compensation Scheme, which guarantees up to £85,000 worth of deposits.

That means money you invest on peer-to-peer platforms aren’t protected in the same way as a traditional savings account, so if a borrower defaults on a loan you might not see your money again.

That said, Zopa has a Safeguard facility which can help if a borrower doesn’t honour their loan. It’s a pot of cash built out of borrower fees that currently stands at over £2.4 million, which can be used to give investors their money back, plus any interest owed after bad debt.

But Zopa has a pretty low default rate anyway. It manages to achieve this by only lending to creditworthy borrowers and breaking up investments into small parts to spread the risk. Historical bad debts since 2010 stands at 0.21%, which it says is less than many banks.

How Zopa’s deal compares

So how does Zopa’s 4.9% deal compare? Well as it stands, you won’t find anything better in traditional savings accounts.

At the moment, the best easy access account from ICICI pays a dismal 1.5%. Meanwhile FirstSave is offering the top-paying fixed-rate bond of 3.25%, but you’ll have to lock your money up for five years. And Leeds Building Society offers the highest paying Cash ISA with a five-year fixed rate deal paying 3.05%.

These rates are nowhere near what Zopa is offering investors, although the ISA return is tax free.

In fact the only high street account which can beat the Zopa 4.9% Rate Promise 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.

However, another peer-to-peer platform - RateSetter - has a better 5.6% rate on offer over a five-year term at the moment. It doesn’t carry the same rate guarantee as Zopa, thoughbut it does have something called a Provision Fund to protect investors from bad debt.

Compare returns from peer-to-peer companies

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Peer-to-peer lending set to be regulated

LendInvest: the first peer-to-peer mortgage lender

Lending Works: the safest peer-to-peer lender around?

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