RateSetter reveals details of first peer-to-peer Innovative Finance ISA

With the new Innovative Finance ISA just months away, RateSetter has become the first peer-to-peer provider to reveal its rates.

Savers looking for a higher return on their savings will get a boost in April when the new Innovative Finance (IF) ISAs launch. This is a new form of ISA which allows you to enjoy tax-free returns from the money you lend out via a peer-to-peer site.

RateSetter this week became the first peer-to-peer site to publish the details of the IF ISAs it will be offering savers from 6th April. RateSetter has four different products offering terms ranging from one month to five years with interest rates of up to 5.7%. That’s MUCH higher than anything offered by normal cash ISAs.

Why savers are turning to peer-to-peer lending

Peer-to-peer lending has proved increasingly popular with savers in recent years looking for a bigger return on their cash. But it also carries more risk. What happens is your money is lent out to people who are looking for personal or business loans. They repay your cash with interest, hence the return. The interest rate is higher because you are taking on the risk that the loan may not be repaid.

However, most peer-to-peer lenders, including Ratesetter, have a provision fund set aside that pays out if your borrower fails to repay. This means that unless a huge number of borrowers defaulted simultaneously you will get your money back plus the interest.

Boost your returns by lending via a peer-to-peer site

How RateSetter’s accounts compare

But is it worth taking on that risk? In the table below I've broken down the rates on offer with the various RateSetter ISA products, and compared them to the best equivalent from a mainstream ISA from a bank or building society. And as you'll see, the difference is staggering.

RateSetter’s IF ISA’s rates are nearly double that of the best Cash ISA across all four products.

“Given the potential for significantly better rates on offer, it’s no wonder that one in four cash ISA holders say they are considering opening an Innovative Finance ISA,” says Rhydian Lewis, CEO at RateSetter.

The interest rates on the IF ISAs fluctuate based on demand, so they may have changed by April. But once you’ve signed up to one of the accounts your interest rate is locked for the term of the account.

The company estimates that the average existing peer-to-peer investor could save £376 a year in tax by moving to an IF ISA.

Boost your returns by lending via a peer-to-peer site

The risks

Just because peer-to-peer lending will be available via ISAs doesn’t mean they carry less risk than before. You are still taking more of a chance with your money than if you kept it in a standard savings account.

Firstly, you run the slim chance that you could lose your money if the people borrowing from you fail to pay – most companies spread your money across several loans to minimise the risk of default – and the company’s provision fund can’t cover the loss.

Secondly, IF ISAs will not be covered by the Financial Services Compensation Scheme. This means if the peer-to-peer company you invest via goes bust you could lose your cash. It is worth noting that Ratesetter does keep client money separate from company money so you would be higher up the list of creditors if it failed.

Still early days

RateSetter is only the first institution to reveal details of its IF ISAs. As the clock ticks down to April many more IF ISAs are expected to be revealed, with Zopa and Funding Circle both intending to launch products.

In the coming weeks more products should be revealed, and with companies keen to grab a slice of the new market the rates should be impressive. You just need to decide if you are prepared to take on the risk that comes with a bigger reward. 

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