8.2 Rate of return

Alternative finance has attracted a range of investors from retail savers to businesses, many attracted by the higher returns on offer compared to low interest rates offered by banks. Low interest rates, in the region of 1–2% in the UK (in 2018), have made alternative finance returns attractive. The peer-to-peer lender Funding Circle, for instance, quotes a return of 7 per cent on consumer loans.

While higher rates are attractive to savers, the risk for the lender is higher too. Alternative finance returns are not guaranteed and the amounts lent are not protected under investor compensation schemes. In the UK, the Financial Services Compensation Scheme guarantees bank deposits of up to £85,000 in the case of bank failure (FSCS, 2018). There is no such guarantee for an alternative finance investor. In order to provide increased security for lenders, online portals use a number of different approaches when pooling and arranging loans.