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Does a Dedicated ISA Make Peer to Business Lending More Appealing?

27/10/2014 17:42 GMT | Updated 24/12/2014 10:59 GMT

We've already got ISAs for cash and ISAs for shares and now the Government is considering a third type; an ISA for peer-to-peer and peer-to-business lenders. In his most recent budget, George Osborne announced he is considering making available an ISA for peer-to-peer lenders, so the interest they earn on their loans becomes tax free.

This would effectively create a hybrid kind of ISA, one which blends the benefits of both cash and shares. But for someone considering peer-to-peer lending to amplify a modest savings portfolio, is the extra potential return worth the exposure?

Peer-to-peer lending, by its very nature, has an element of risk that saving does not, but in return for that extra risk, you can expect to see a return that far outperforms what you'd get with traditional saving. You'd be looking at around 5 and 7 percent returns on your outlay (with some companies this can be as high as between 12 and 15 percent), compared with the pitiful savings rates were still seeing today.

Plus, the better established organisations that facilitate this sort of lending do offer certain safeguards. Lending Works, for example, offer default insurance to add an extra layer of protection for edgy lenders, and loans made via Assetz Capital, who specialise in peer to business lending, are backed by asset security.

Martin Lewis summarised the overall concept neatly when he said peer-to-peer lending "looks like saving, tastes like saving, but as there's no savings safety guarantee, it smells like an investment."

So what is peer-to-peer and peer-to-business lending? It is effectively a means of investing in businesses or social initiatives (or just lending someone some cash) without assuming all of the risk. You're typically not the only investor and the risk is spread among a 'crowd' of lenders. Your potential returns, as mentioned above, can be far better than what you'd earn with a safer savings vehicle.

These are normally small, unsecured loans (some secured lending is possible too, especially for businesses borrowers) and borrowers are credit checked. You set the interest rate you feel is appropriate for the risk you're undertaking and the would-be borrower picks the deal that best suits their needs. You may effectively be offering money to people who will elect not to take it. There are distinct benefits for both sides.

As the industry is evolving, companies are finding new and interesting ways to differentiate themselves. In April 2013, Assetz Capital broke the record for the largest peer-to-peer loan in history, funding the development of student accommodation in Nottingham with £1.5 million - three times the size of the previous largest peer-to-peer loan.

It's an exciting, rapidly evolving industry with numerous disruptors and innovators. If you're tired of watching your savings stagnate but want ultimate control and say in where your money goes, it could be for you.