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With interest rates so low for the majority of savings accounts, you could be looking for an alternative place to put your money to get a good return. One popular area in recent years is peer-to-peer lending, where you can save directly with other borrowers.

The Government is launching Innovative Finance ISAs to encourage savers to use peer-to-peer lending products and pay no tax on savings interest. But what is peer-to-peer lending and how does it work? And are there any risks in saving your money with peer-to-peer lenders? Let’s find out.

What is it?

As we explained, peer-to-peer lending is a way for you to save directly with people who are looking to borrow money. This is designed to cut out the ‘middlemen’ so borrowers can get a better lending rate – and you can get a better saving rate. Standard savings accounts or ISAs currently offer around 2% interest, but peer-to-peer lending products can offer as much as 6% interest.

The Innovative Finance ISA is a new Government initiative to encourage savers to use peer-to-peer lenders to look after their money. It means savers can put any peer-to-peer savings they have into the ISA and pay no tax on their savings interest.

Innovative Finance ISAs are a third type of ISA alongside cash ISAs and stocks and shares ISAs. That means that you could split your savings between all three sources and still not pay any income tax on the savings interest you earn.

There have been some concerns that peer-to-peer lending isn’t a safe option for savers. This is because any money saved isn’t protected by the Financial Services Compensation Scheme (FSCS). However, a lot of the mainstream peer-to-peer lenders offer their own protection schemes and it’s important to look into these before you consider saving with any peer-to-peer lender.

If you’re considering saving with a peer-to-peer lender, it’s important to be aware that there is some risk and the value of your money can change over time. You should consider speaking to a financial advisor before you save your money with any provider if you’re at all uncertain – they’ll be able to help you decide what’s best for your money.

Delays for providers

When the Government announced the Innovative Finance ISA in the Summer Budget 2015, many providers seemed poised to set up their own products. However, the Financial Conduct Authority (FCA) has to regulate these peer-to-peer lending products and most of them haven’t been approved yet.

If you want to save in an Innovative Finance ISA, it might be best to wait until the FCA has approved more products. That way, you’ll be able to take advantage of a wider range of savings products get the most for your money.

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