Poor savings rates offered by banks and building societies are pushing savers into looking for better returns with alternative investments.
Many savers want to boost their retirement income with a fixed return.
Two options are peer to peer lending and crowdfunding.
This quick guide looks at the returns – and the risks – for investors
Peer to Peer Lending – the returns
Peer to peer lending is a relatively new online concept that matches lenders with borrowers by cutting out the middle men – banks and building societies.
Each platform works in a slightly different way, so direct comparison between the two takes a bit of digging to work out interest rates and the fees involved.
Most platforms have an interest rate calculator giving estimated returns, but the rate is not fixed until the deal is actually sign and sealed.
Sniffing out the deals
Before reaching this point, lenders should look for a clear list of terms, conditions and returns before committing their cash.
It’s a good idea for savers to shop around peer to peer platforms to sniff out the deals and returns that they are comfortable with.
As a rule of thumb, high street savings accounts offer returns of between 1.5% and 3% before tax. The highest rate comes with the longest term, which is generally a five year lock in. Banks and building societies will also want a minimum deposit of anything from £500 to £50,000 to get these top rates.
Peer to peer average rates are between 2.5% and just over 6% before tax over comparable terms. A minimum cash input with a tie-in for the term of the loan from £100 upwards is also required, although some platforms will allow early access to funds if another peer to peer lender is ready to step in with replacement funds.
Peer to peer offers guaranteed returns, but is outside the Financial Services Compensation Scheme (FSCS), so if a deal turns sour, the likely recourse to compensation is through a reserve fund maintained by the platform or the courts.
Guarantee or gamble?
Funding Circle specialises in peer to peer lending for businesses. To minimise risk, the platform shares 1% of each investor’s stake across 100 business loans.
Crowdfunding is more of a gamble. Investors are generally taking an equity stake in a business or project that has a risk of failing in the early years and have no guaranteed return.
The possibility of losing cash staked on a deal is high.
The return depends on the performance of the project – if the deal succeeds, the returns can be excellent. However, while peer to peer returns can be taken monthly, crowdfund investors may have to wait at least three years to see a penny back.
Investors looking for a guaranteed income return should look to peer to peer lending, while those who can afford to lose their stake and gamble on profits are likely to find crowdfunding more to their taste.