There's a new name in the peer-to-peer arena with the arrival of Swedish company TrustBuddy in the UK.
The company has been arranging short-term peer-to-peer loans between individual people across several European countries since 2010. It claims people lending money have seen an average return of 12% a year.
Peer-to-peer has grown in popularity over the last few years as an alternative to traditional banks, where lending has dried up and savings rates have taken a nosedive.
Let's take a closer look at how TrustBuddy works.
How it works for lenders
With TrustBuddy you can lend as little as £50, with no upper limit.
Money invested is automatically divided up and distributed to multiple borrowers that could be in any of seven countries including Norway, Sweden, Finland, Denmark, Poland, Spain and, soon, Estonia.
Lending small amounts to multiple borrowers is a tactic employed by peer-to-peer websites to spread risk, as it reduces heavy losses if one borrower defaults on a loan.
TrustBuddy says it manages to keep bad debt below 1% as borrowers undergo a strict credit evaluation. It claims 90% of people who apply for a loan are declined.
TrustBuddy says that in 2011 the average net return after bad debt was 13.3%, while in 2012 it rose to 18.8%. This year TrustBuddy investors are apparently on course to get a 12% average net return.
As well the possibility of a great return, investors can get relatively easy access to their money. You only need to give two days’ notice and 90% of what’s invested can be withdrawn.
These returns are of course not exempt from tax, so you will need to pay what you owe via self-assessment.
How lenders earn interest
European borrowers in the seven countries mentioned above can get loans ranging from €100 to €600, which they initially borrow for 30 days.
Loans are free of charge for borrowers that manage to pay back what they asked for within 14 days. In this case neither TrustBuddy nor investors get a return.
If this doesn’t happen then between the 15th day and 30th day a set-up fee is applied, according to how much was borrowed, as well as 12% interest, which goes to the investor.
Borrowers that need more time to pay back the loan, set-up fee and interest after 30 days can choose to extend it by another 30 days for a fee. Borrowers can renew the loan up to five times.
The size of the fee works on a sliding scale, again dependent on how much was initially borrowed. It is payable upfront and not added to the outstanding amount. TrustBuddy says this is to show a sign of commitment to paying and so that borrowers don’t get dragged into a debt spiral.
For €100 a charge of €19 is due, €350 attracts a £39 fee, while for €600 a charge of €56 is payable.
TrustBuddy says 30% of people pay back what they owe within 14 days, while 20% manage it in the 15- to 30-day period where a set-up fee and 12% is charged. Around 30% tend to renew, while the other 20% might have to be referred onto debt collection. If they don't stump up straight away they will be given a repayment plan.
This mixed bag of behaviour means some returns come through quicker than others.
Returns depend entirely on the time of loan repayment and whether money is lent out again. But on average this all irons out to a return of 12% annually.
As with all peer-to-peer investments, returns aren’t guaranteed and there is a risk you could lose some money. But the historical averages are promising, as is the bad debt figure.
Perhaps the only other reason you might not want to invest with TrustBuddy is on ethical grounds, as it is essentially a peer-to-peer payday loan provider.
But TrustBuddy says it has produced an ethical product where both borrowers and lenders are getting a better deal.
Other peer-to-peer sites
Of course there are plenty of other peer-to-peer websites you could try instead.
Zopa is offering a return of 5.7% on a five-year investment and comes with a Safeguard fund which will ensure you never lose money. Or there's RateSetter, which has a Provision Fund to protect lenders and is offering a return of 5.5% on a five-year investment.
If you fancy lending to small businesses instead of other people, Funding Circle is advertising returns of 5.7% right now.
Things to bear in mind
While peer-to-peer sites offer the promise of better returns than traditional savings accounts, there are a couple of important things to remember. The first is the industry is not regulated yet, although it will be from next April. The second is your money is not protected by the Financial Services Compensation Scheme, which guarantees the first £85,000 of your money if an institution goes under. However, many peer-to-peer companies do have some sort of contingency fund in place.