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Lenders need to relend
Peer to Peer lending is not all its cracked up to be and the rates are misleading. If you lend £10,000 for 5 years at 5%, you will receive a fixed payment every month that consists of both capitol and interest. But as the capitol decreases you only get 5% interest on what is still owed. So month after month the fixed payment is more capitol repayment and less interest. Lending with Rate Setter, a £10,000 loan at 5% gives a Net return (after fees) of £11,296. A 5 year Fixed Rate Bond with interest at 2.44% AER will give the same return. The only way to beat these rates is to loan to the high risks borrowers.
This is true, but with peer-to-peer lending, you need to relend your funds as soon as they are repaid. The major P2P companies all have different mechanisms to enable lenders to do this, and these are detailed on the P2P company attributes as "Automated Lending". As funds are repaid by the borrower, the lender will need to relend in order to receive the headline interest rate. If a lender chooses to leave these funds in their holding account they will, of course, only receive interest on the funds actually on loan.
Most P2P loans work in the similar to a regular savings account (but actually in reverse as at the start you have all of your money and at the end you have none). With a regular savings account you typically lend a fixed amount of money per month. Lets say, for example, we choose to save £100 in a regular savings account at 5%. At the end of the year we will have £1,200, but we won't be paid £60 interest (£1,200 @ 5%) as we have not had the full amount on loan for the full year.
While rates have dropped recently, the rates are still in excess of what savers can achieve in classical savings accounts, and while P2P loans do carry additional risk, these are still a good investment, and a fantastic choice for borrowers.