Why Chelsea took all her savings and lent it to total strangers

Peer-to-peer lender RateSetter says 56 per cent of money invested with it is from savers withdrawing their money from their bank savings accounts.

Yield-hungry investors are understandably frustrated with earning next-to-nothing on their cash held at their banks, with interest rates at historic lows and likely to stay that way for the foreseeable future.

With the the advent of peer-to-peer (P2P) lenders, online platforms that match investors and borrowers, investors can get up to three times the interest paid by term deposits.

P2P lenders charge borrowers lower rates of interest than they would pay on bank loans, while lender-investors earn higher interest than they could get with a bank term deposit.

RateSetter figures show that younger people - those in their 20s and early 30s - are strongly favouring one month terms.

It runs counter to their portrayal in the media as being more likely to fritter away their money on smashed avocado on toast than save it.

"These young investors are seizing the opportunity to make their money work hard," says Daniel Foggo, the chief executive of RateSetter.

"For a variety of reasons they may want ready access to their money, so the one-month market gives them a stable, attractive return of around 4 per cent a year easier access to cash if they need it."

P2P lenders have a long way to go before they gain a significant share of the savings market enjoyed by Australia's banks, but they are growing quickly.

In the United States, P2P lending is mainstream, with reports that they could be facilitating up to a quarter of all personal loans.

RateSetter is part of the RateSetter group, which was founded in Britain in 2009 and was launched in Australia in 2012 as the first open to retail investors. It has more than 8,000 Australian investors registered to lend on its platform.

There are at least half-a-dozen other P2P lenders operating in Australia, so it's important to shop around for the best deals.

Chelsea Crichton, who works as a customer services manager for a property fit-out company in Sydney, has managed to save quite a bit but was disappointed with the tiny interest she was earning on her cash with her bank.

After reading about P2P lending in an article on investing, a year ago she pulled her savings from her bank to put it with RateSetter.

She has the money spread between terms of one month, one year and 3 years.

She is earning 9 per cent on the 3-year term, which is about three times what she could earn with a term deposit, 5 per cent on her one-year investment and 4.5 on the one-month term.

The 27-year-old would like to eventually buy a property, but because of sky-high property prices she expects she will be renting for a long while yet.

"Every month, RateSetter sends me an email telling me how my money is invested," Chelsea says. And as her money matures, she has the option of rolling it over into other terms.

Chelsea doesn't know anything about those who are lending from RateSetter, which says it checks the creditworthiness of borrowers.

Almost all of the loans are for unsecured personal loans.

Although RateSetter has a "provision fund", which holds more than $5.7 million, from which it has made good late repayments and compensated investors for losses, it is not an iron-clad guarantee for investors.

Bank savings accounts pay next to nothing and term deposits, depending on the term, can pay up to about 3 per cent, but savers with authorised deposit taking institutions have the first $250,000 of deposits protected by the federal government.

This story Why Chelsea took all her savings and lent it to total strangers first appeared on The Sydney Morning Herald.