So, for the first time, I am stepping into the world of 'peer-to-peer' lending. This is a way of borrowing and lending money that bypasses the High Street banks - individuals lend to other individuals, with a company providing the credit checks and collecting the repayments for you.
A word of warning, however: this use of your hard-earned cash is not guaranteed by the government, although the companies involved are regulated. After all, no-one can force the borrowers to repay the money they borrow from you.
I have looked at peer-to-peer lending before and filed it away under 'too risky/too unreliable'. However, I like the novel approach that RateSetter takes. Other lenders tell you to expect a small amount of bad debts or late payments. However, RateSetter has instead put in place a Provision Fund which is intended to deal with the infrequent incidents of non-payment. Although they point out that this does not amount to a guarantee, as such, they note that every lender has - so far (according to them) - received what they were expecting, in terms of interest and return of capital.
What is more, the website is very easy to navigate and the on-line activity is surprisingly transparent. Lenders choose their target interest rate and lending period (up to 5 years) and the amount they want to offer; they then join a queue of lenders at that rate and wait for the software to match up the money available with the lenders looking for a loan - you can watch the process in (almost) real time. You can also elect to have this money automatically re-lent at the future current 'market rate' or have it returned to your 'holding account'.
Borrowers are typically people buying cars: the default rate is miniscule.
It is easy and quick to register and transfer cash (with a debit card, for your first three deposits) - I was up and lending in a day. There is even a function to withdraw interest at regular intervals to give you an income. As with savings bonds, you normally would not have access to your capital over this time - although it is possible to get it back at the cost of lower interest payments (which would defeats the object of trying to get better returns). So make sure that you won't need the money for the period you tie it up.
The prevailing interest rate is set by demand and supply. Currently (early March 2013) the 5-year interest rate is hovering around 5.6%, much higher than available in any ordinary savings bonds or even Cash ISAs. But this return carries risk, so I am only investing a portion of my cash savings.
Of course, any income is liable to income tax, so you should consider your overall tax position. If you are a taxpayer, this sort of return is available for many securities in a Stocks & Shares ISA - tax-free.
[Lending rate for 5 years: average 5.65 %]
Update May 2021: Ratesetter is no longer available to retail lenders.
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.