The peer-to-peer platform has launched its best guaranteed return yet, but you’ll need to move quickly to take advantage.
Zopa has launched its best ever Rate Promise.
The peer-to-peer website is now offering a 5.2% return when you invest for up to five years or 4% for up to three years.
Zopa’s 1% Annual Lender Fee is already factored into these rates.
But if you began lending on Zopa before August 2008 the Annual Lender Fee is just 0.5%, meaning the Rate Promise will guarantee a higher return of 5.7% over five years or 4.5% over three years.
And so-called founding members who joined up very early on can earn a rate of 6.2% over five years or 5% over three years as they pay no Annual Lender Fee.
If you like the sound of these returns, you’ll need to move quickly as they will only apply on money lent to borrowers before midnight on 3rd June 2014.
How the Rate Promise works
You’ll need a minimum of £10 to get started, but can invest as much as you like.
Zopa will take what you deposit and lend it in small chunks to different borrowers during the ‘offer period’ (from now until midnight on 3rd June 2014).
Zopa's Rate Promise is unique in the peer-to-peer world as it works like a fixed rate bond.
Returns are guaranteed when you invest over five-or three-year terms, but you get better flexibility on your cash as you can sell on your loans to other investors (subject to a 1% fee) to get your money back through Zopa’s Rapid Return Facility.
What you should know about peer-to-peer
Peer-to-peer platforms like Zopa act as financial matchmakers.
They introduce savers willing to lend money directly to borrowers, 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 and building societies, where lending has died down and savings rates have tumbled.
The sector is now regulated by the Financial Conduct Authority (FCA) and the Government will soon allow peer-to-peer investments to be included in ISAs. You can find out all about the big names in the industry by reading: Peer-to-peer: what return will you get on your money?
However, the money you invest in peer-to-peer platforms like Zopa aren’t protected in the same way as a traditional savings account.
[SPOTLIGHT]The Financial Services Compensation Scheme or FSCS protects up to £85,000 of UK deposits per individual per institution, but this level of security does not apply to peer-to-peer investments.
However, Zopa has a Safeguard facility which can step in if a borrower defaults on repaying their loan. The pot currently stands at over £3 million and can be used to give investors their money back plus any interest owed.
Zopa keeps its default rate low by only lending to people with a good credit history and spreads risk by breaking up investments into smaller chunks. Historical bad debt since 2010 stands at just 0.19% on overall lending.
Many other peer-to-peer lenders offer similar facilities. RateSetter's CEO Rhydian Lewis has written an article for us explaining exactly what his firm is doing to make peer-to-peer lending safer.
How Zopa’s rates compare
So how does Zopa’s new Rate Promise compare? Well as it stands, you won’t find anything better in a traditional savings accounts.
At the moment, the top five-year fixed rate bond comes from the Bank of London and the Middle East and pays a return of 3.5% on deposits from £50,000, while the top five-year fixed rate ISA from Skipton Building Society pays 2.75% on deposits starting from £500.
With comparable three-year rates it’s the same story. The Bank of London and the Middle East is offering 3% for those with a balance of £50,000 on a three-year fixed rate bond, while Nationwide is offering the leading three-year fixed rate ISA paying 2.25% on deposits from £1.
As you can see, Zopa’s 5.2% five-year or 4% three-year deals are much better than anything you can get from a bank or building society at the moment over the same term, especially if you’ve got a smaller sum to invest.
In fact the only deals that come close to offering a better rate are found in current accounts.
TSB’s Classic Plus offers 5% on balances up to £2,000, while Nationwide’s Flex Direct will pay 5% on balances up to £2,5000 for 12 months. The accounts offer easy access to your cash but you need to fund them each month to keep earning interest.
Outside of traditional lenders, other peer-to-peer platforms offer some more competitive rates than Zopa
RateSetter is offering a 5.8% return over five years, while Lending Works is offering 5.6% over five years or 4.1% over three years, but neither platform will guarantee the rates on offer like Zopa, so they will be susceptible to market fluctuations.
More on savings:
The best fixed rate savings accounts
Where to earn most interest on your cash