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Forget Osborne's firm but fair sound bite, here's what the Budget really means: interest rates will remain pinned to the floor with no respite for savers. That's the reality we face. And it's going to leave a lot of ordinary savers out of pocket.
Luckily, we don't have to suffer that fate, because the internet offers a way to earn decent interest on your money – around double what the banks are offering. Interested?
Well I'm going to reveal all in a moment. First, I want to tell you why I reckon this budget means rates are staying low for a while yet.
Two reasons why rates will stay down
The Con-Lib budget placated the government bond market. The threat of a gilts strike seems to have faded as the Government tackles debt reduction. Britain can carry on borrowing. Big sigh of relief.
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And now that Europe's imploding, we've even got Germans, Greeks and French desperate to lend us money. The pound has shot up and there's no need to offer generous terms to our lenders. That means low interest rates. Bigger sigh of relief. And I'm sure they're staying down too.
The very nature of the budget – austerity – is deflationary. We're raising taxes and cutting spending; basically, back-tracking on labour's largesse. The economy must deflate. This points to interest rates nailed to the floor. That's what's really going to hurt ordinary savers.
The stealth tax that pays the bankers
All the media brouhaha about the minutiae of the Budget re-jig misses the point. The fact that Mr & Mrs Average will be £267 worse off because of a bit of VAT here, income tax there and then a bit of CGT over there – who cares? In the end we're all going to have to pay for the financial pickle we've been dumped in.
It's not some trivial matter of £267, it's the tens of thousands of pounds that really matter. And that's collected through the silent tax, the tax that is so stealthy it doesn't even hit the radar as a tax. It's the tax that transfers wealth from savers to bankers. That's persistently low interest rates. This is the tax that hands the banks fattened profits – all paid for by savers.
As the Bank of England can now hold base rates at 0.5%, banks can offer savers practically no interest. And yet they charge borrowers as if rates were ten times that! This is a scandal. A scandal that allows the banks to rebuild their pitiful balance sheets, all at the expense of savers. And with the government owning vast chunks of the banking industry, it's a stealth tax they're happy to go along with.
I'd like to show you a way of avoiding handing them your money by tapping into one of the biggest 'people-power' phenomenons of the last decade.
Dump the banker and claim double the interest rate other people get
Person-to-person websites are the big, big thing. Just look at Betfair, e-bay or Facebook. All of them are platforms for punters like you and me to communicate and trade with each other without the need for a middle man. Cut out the bookie, cut out the high street store, heck you can even cut out the NHS if you're desperate enough for a kidney from India!
Well I'm looking at a way that takes it to the next level, and cut out the banker.
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Here's how it works:
There's a website called Zopa – that's the facilitator, the banking equivalent of Betfair, or e-bay. Zopa provides the platform that brings together a borrower and a lender.
If you want to lend money, you go to the website, set up your account and all the normal paraphernalia. Then you get down to brass tacks. You say how much you want to lend, who you want to lend to (borrowers are graded using the normal credit agencies like a bank would use) and pick a repayment term.
Then there's an auction between lenders and borrowers that finds you a match. Once everyone's happy, you put your money down. And the borrowers pick your money up.
Your funds are normally spread over many borrowers to reduce risk. As a lender, you pay 1% a year to the facilitator for managing the service. The borrower pays a one-off fee to the facilitator too. After that, he's paying you your money back, plus interest.
According to the Telegraph, you can expect a return of 7.8% to 11.5% depending on how risky the person you lend to. Bad debt seems to occur in 0.4% of transactions with top rated borrowers and in 5% with the more troubled borrower. After fees, you'd be looking at around 6% return. 6% - now that sounds interesting.
Does the system work?
I'd love to hear from you if you've been involved with Zopa, or a similar scheme. They call it 'social lending', whatever that means. To me, it's simply lending without the middle-man. No bank. That suits me!
At face value, it looks good. Okay, it's not covered by the financial services compensation scheme, but then again, you get to spread your money across loads of borrowers.
Right now the banks pay savers next to nothing and charge borrowers as if they're government sponsored loan sharks. And yet, here's a system that lets us by-pass the banks... hey, I've almost convinced myself that this is a social service after all!
Here's what I'm doing. I'm going to set up an account. I'm going to lend £1k to each of the credit risk groups. Then I'm going to sit back and see how it goes and I'll let you know.
I'd love to hear from you if you've had any experience with a 'social lending system' and share it with the rest of us. Loan sharks - you don't count.
Bear in mind, these 'social lending' sites aren't covered by the financial services compensation scheme, so your money isn't guaranteed.
• This article was first published in the free investment email
The Right Side
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