What's an ISA and why is Rate Lock so important?

We’ll start from the top, a.k.a. A short history of nearly everything you need to know about ISAs.

What’s an ISA? 

As a British citizen, you're entitled to save £20,000 every year, tax-free. This comes in the form of an ISA (place you chuck money and forget about it for a rainy later-life).

At first glance, tax-free interest on up to £20,000 might not seem worthy of setting a midnight alarm to get up and eagerly deposit £££s on the first day of the financial year: it's no Spice Girls reunion tour ticket. Or is it...

Real world, human example #1

You're 35. You've been financially fortunate and responsible for the past few years and have hit £20,000 in savings. You'd like to put it away to supplement your retirement, put a deposit down on a house in the mid-term, or quit your job and open a quaint antiques store in Devon. 

Sitting idly in a classic bank account, your money will decrease in value due to inflation adjustment over time, e.g. what would get you 5 cows in 1999 will only get you 2.3 cows in 2019. And no-one wants .3 cow.

Sitting in a tax-free ISA, however, that money can start working for you. Let's say that ISA had a 5% AER...

Moving your £20,000 savings into a 5% ISA today would grow your nest egg to around £32,578 in ten years – a big help towards that deposit.

After 20 years, your £20,000 becomes £53,066 – the Devonshire antiques dream becomes reality.

After 30 years, your £20,000 is now £86,439, just in time for the wildest first year of retirement this side of Elon Musk’s fifth mansion.

It’s all tax-free. And you can open a new one every year. Now, that's probably worth setting your midnight alarm fo

ISA season: busy, complicated, volatile

To get a competitive rate that can result in the cumulative gains shown above, you're probably going to have to look away from traditional banks and invest in an alternative, such as peer-to-peer lending. That’s us. Hi. 

Old-school banks make money from your money by loaning your savings to borrowers at a high interest. They'll typically offer ISA rates just measly enough to stave off what you’d lose from inflation adjustment. 

By quick comparison, on £20,000, a standard 1.5% ISA will earn you only an extra £11,262 over 30 years in contrast to the £86,439 above. 

So, how can Lending Works provide higher returns?

We loan your money to borrowers, just like banks. The difference? We give the borrowers fairer rates and we give you a bigger share of the interest paid on your investment. It’s a win-win.

It’s important to remember that with investments, your capital is at risk and returns are never guaranteed. However, if you want guaranteed returns you’ll generally need to lower your return expectations. Ideally, you’ll find a risk/reward balance which suits your risk appetite and personal circumstances.

Real world, human example #2 

You invest £20,000 with us at 6.5% AER.

That week, 1,000 creditworthy borrowers apply, and are approved, for 1,000 loans at 10% APR. 

Your £20,000 investment is pooled with all our other investor funds and diversified over the 1,000 borrower loans.

As the 1,000 borrowers repay your £20,000 in monthly instalments, their repayment plus the 6.5% interest comes straight to you (you can have this popped into your current account, or we’d recommend auto-reinvesting to take advantage of ISA’s tax-free cumulative interest discussed above). 

To be fully transparent, in this scenario we’d keep the 3.5% difference in interest between the borrower 10% APR and your 6.5% AER. This allows us to help protect you against losses on your loans, build infrastructure, hire staff, and implement industry-leading security. It also allows us to develop a successful, ethical business: we’ll always put you before our own profits.

Of course, as with all investments, your capital is at risk.

To read more about how we mitigate agaist risk, click here. It'll tell you all about our triple-layered protection (which we've called the Lending Works Shield). 

Rate fluctuation

Everybody wants your ISA savings. Whether it’s old school banks, higher-risk investment portfolio management firms, peer-to-peer lending platforms, or the myriad other options. Like we said, your money makes the guys who look after your money, money.

There are two main things to look out for from the guys who look after your money:

- Who gives you the best rates?

- Who has the most balanced risk vs reward? 

Let’s say you understandably want a better rate than offered by banks but aren’t comfortable with the high risks or volatility involved with other investments, that’s where peer-to-peer lending comes in. It’s a cosy middle ground. If banks are worn-in slippers and stocks and shares are kitten heels, we’re your gym shoes.

However, whilst everyone wants to look after your investment, at this time of year there are also an influx of investments being made:

Supply and demand has entered the chat.

This influx of investment generally drives down market rates on peer-to-peer ISAs. There’s suddenly a lot of money to loan out but only a consistent amount of borrower demand.

With peer-to-peer investing, rates can vary from week to week based on this supply and demand. Additionally, during such a period, there’s also a chance your investment could take a few extra days to be loaned to borrowers. If the rates change whilst your investment is in a loan queue, your investment will be matched at the current rate at that time. 

A layman’s sequence of events:

- Rates are 6%

- You invest £20,000

- 4,000 other people also invest £20,000 because it’s the end of the financial year

- This abundance of cash dollar can’t all be lent out immediately because there aren’t enough borrowers

- Your £20,000 goes into a queue

- Rates drop to 4% due to investor volumes

- Your £20,000 reaches the end of the queue

- Your £20,000 is loaned at 4%

Does it matter? On £20,000 over thirty years, an AER drop of 2% would cost you around £50,000 (assuming auto-reinvestment at an equivalent rate).

ISA season: clean, easy, reliable

So, why did we explain all that? Well, it’s hopefully helpful to someone. For something as simple as ‘putting money away to make interest’ everyone sure has managed to make it complicated to navigate. 

Conspiracy theories about this being an intentional tactic welcome.

Oh, we also mentioned it because we’re holding a two-month Rate Lock.

Some providers will offer sign-up or transfer bonuses or free gifts. That’s nice and all, but it can feel a bit like a distraction, ‘one sweet now or two sweets later.’ Only instead of sweets it’s £500 now or potentially tens of thousands later, and we’re big-picture people.

We don’t want you to be caught out.

Over ISA season, regardless of supply and demand, our rates will stay at a competitive 6.5% and 5% respectively. This means, providing you don't wait until the last week or so, you can be confident the entirety of your investment will get matched at the advertised rates.  

Rate Lock

04.03.2019 – 05.05.2019

Invest now


Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.

As with all investments, your capital is at risk.