Life has been pretty tough for savers in recent years, so its hardly surprising that many people are looking at alternative ways to boost the amount of interest they earn.

Peer-to-peer lending websites, that enable savers to lend money to individuals and small businesses needing loans for example, are one option.

The idea is that savers earn higher rates of interest than they could get from a standard savings account as they are cutting out the costs of the middle man namely a bank or building society. And, as for borrowers, they can often find cheaper loans than if they went to a mainstream lender.

For savers

The first thing to note when investing in a peer-to-peer lending website, is that your money wont be protected by the Financial Services Compensation Scheme (FSCS), which covers up to 85,000 of your money in the event that a bank or building society goes bust. Well explain more about this later.

Youll then need to establish how much money you want to lend and over how long. Borrowers will pay you back over this period, with interest on top. You can usually start lending with as little as 10, although the more you are prepared to invest and the longer the term, the higher your potential returns will be.

Usually your money will be lent across several borrowers to help reduce the level of risk. In other words, if one of them struggles to make repayments, it wont have such an impact as if youd lent to them alone.

Most peer-to-peer lenders offer their own protection schemes too (often called provision funds) which will compensate you in the event that borrowers default on their payments. As a saver, you wont have to contribute to this fund. Instead, borrowers usually pay a credit rate fee towards the scheme.

But, as previously mentioned, provision funds are NOT the same as the 85,000 worth of protection you would be offered at any mainstream savings provider via the FSCS.

Peer-to-peer lending sites also minimise risk for savers by vetting borrowers very thoroughly. Some sites turn down the majority of applicants and anyone with a poor credit rating or who has defaulted on loans in the past will definitely not be accepted.

. savers earn higher rates of interest than they could get from a standard savings account as they are cutting out the costs of the ‘middle man’ – namely a bank or building society.

What sort of returns can I expect?

As a rule, the returns advertised by peer-to-peer lending websites are much higher than those offered by bank and building society saving accounts. However, to get the very best rates, you will have to commit to lending your money for the longest time up to five years in fact.

Just as with a fixed rate bond, you will have to lock your money away for whatever term you choose, so think carefully about the duration before you sign up.

If you need to access your money before the term ends, most schemes enable you to sell on your loan. But, as it will need to be on exactly the same terms and within the same timeframe, the process can take a while. There will usually be charges involved too so its best avoided if possible.

Even if you stay within your agreed term, peer-to-peer lending comes with standard charges for savers its how the sites make their money. But these are usually a slice of the percentage rate you earn and factored into the advertised rate. In other words, as a saver, the rate you see is the rate you get.

Peer-to-peer sites are you protected?

Peer-to-peer lending websites have been regulated by the Financial Conduct Authority (FCA) since April 1, 2014. This means all sites now have a duty to ensure consumers are fully informed about how peer-to-peer lending works before they commit their cash.

As we have mentioned, FCA regulation still doesnt mean your savings are covered by the FSCS. But peer-to-peer lending sites do have their own provision funds in place which are designed to pay out in the event that one or more borrowers cant meet repayments

Always read the small print carefully so you know the level of safeguard thats offered and whether the fund is held by an independent third party.