The most common reason borrowers apply for a peer-to-peer loan is to buy a new car. But so far the risk is paying off. Borrowers, who bid for a lower rate than the banks would charge them, are also winners. RateSetter has also adopted a banking convention of a reserve for bad loans with a provisions fund financed by a charge on borrowers based on their risk rating. Although designed to bail out lenders in a default on a loan, access isn't automatic – it's a call by RateSetter. But so far $10 million has been lent without any defaults.

Besides a much better rate and higher risk, there are other striking differences with a term deposit. The terms of P2P lending can be more fluid than the fixed certainty of a term deposit. Take RateSetter's one-month loan. In reality the term can easily drag out to one year because, like a bank that borrows short and lends long, it has to find new lenders to replenish funds. Similarly a one-year loan can stretch all the way out to two years though you still get paid the same interest rate. The three and five-year terms are locked in so you get some of your principal back each month along with the interest.

So with a five-year loan, for example, of 60 instalments you would have all your capital back after 3.75 years. While an advantage over a term deposit, where the whole amount is untouchable for five years, this can also be a trap. You earn the same interest rate but it's on a shrinking amount. Unless the repayments are re-invested they'll sit there earning nothing. Another thing. Just as banks hate creditworthy customers paying their debt off early, so will you. It means the money has to be re-lent at a potentially lower interest rate. Colin Bernasconi lent $10,000 for three years at 7.4 per cent after taking the 10 per cent RateSetter fee into account three months ago. He has no idea who borrowed it, and doesn't care.

RateSetter did all the credit checking but keeps borrowers and lenders anonymous from each other. Loans can be secured or unsecured but you don't know which one you'll be signed up for. "It seems to be mainly car loans. A loan is more solid if it's being used to buy a vehicle, so there's a physical asset, rather than, say, paying for a honeymoon. "It's a great concept – I'll definitely be lending more. But if I see drawdowns from the provision fund I will reduce my loans," Bernasconi says. Nor is he fazed by the fact RateSetter doesn't reveal the credit ratings of borrowers. "You don't see the score but you have the provision fund instead. That's better than waiting for somebody to default," he says.

Bernasconi is thinking about drawing down the offset account on his mortgage, which pays 5 per cent, and lending it at 8 per cent. "It's a higher risk but worthwhile and it's not a lot of money," he says. Most lenders start small to make sure all is above board then top up their loans. The minimum loan is just $10. In the year since RateSetter started "there has been no loan default so far. In the UK (where it originated five years ago) the default rate is under 1 per cent," chief executive Daniel Foggo says. The main reason is that RateSetter's credit rating approved borrowers "are people who could get a loan from a bank, not those who can't."

But ANZ Bank's chief executive Mike Smith has warned P2P loan defaults are low because so are interest rates. "When people get burnt, the question is going to be asked, why are you being burnt, who regulated it?" Still, so far so good. The biggest credit union, CUA, is even reportedly looking at partnering with P2P lenders because of their "very strong understanding" of risk. RateSetter's average borrower owns a home and earns $90,000, Foggo says. "The most common reason for borrowing is to buy a car."

The average amount lent is $7000 and $40,000 for DIY super funds. Going rates are around 4 per cent for one month, 5 per cent for one year, 8 per cent for three years and 10 per cent for five years, according to RateSetter's website. Twitter: @moneyPOTTS