Earn up to 9% on your savings
Fed up with high street banks offering pitiful savings rates? Rachel Wait investigates an alternative way to save...
These days, any saver knows it’s virtually impossible to get a decent return on your savings. As a result, you might be considering ditching your high street bank and simply stashing your cash under your mattress.
However, thanks to a new social lending platform called Funding Circle, there is a way you could earn a far greater return on your savings.
How it works
By doing this, not only will you be able to avoid the hassles that come hand in hand with the big banks, but the potential returns are far better than you’d get on a standard savings account.
In fact, the average rate enjoyed by lenders on money lent through Zopa over the past year was 8.3% (after fees and before bad debt). In comparison, according to Moneyfacts, the average interest on an easy access savings account is 0.74%, the average rate on a three year fixed-rate bond is 4.05%, and the average rate on a five year bond is 4.08%. So 8.3% is pretty attractive.
But what about Funding Circle?
Funding Circle shares similarities with Zopa. But instead of being able to lend to other individuals, you will be lending to small businesses. In return, you could be earning an average of 6% to 9% on your cash.
Funding Circle allows you to lend between £20 and £2,000 per business for a period of one or three years. The idea is to divide your money between several different businesses to spread your risk. There’s no limit on how much you can lend in total.
Borrowers then pay you a fixed amount each month which includes interest and a repayment amount.
Ed Bowsher takes a look at Zopa, an interesting alternative to the high street banks
Ways to lend
As well as choosing how much you want to lend, you can also choose which businesses you want to lend to. So you’ll be able to see a list of businesses that need a loan and then select which ones you want to lend money to. So if you fancy only lending to businesses in your area or in a certain sector, you’ll be able to do just that.
When you click on each business you’ll be able to see a bit more about it, including how long the business has been trading for. Each business must have been trading for at least two years – although the average so far is 30 years.
Once you’ve decided who to lend to, you can choose how much you want to lend to each business and at what rate of interest. Each loan is listed for 14 days to allow the borrower time to achieve the target required from a range of lenders. If the loan target has been met at the end of those 14 days, the lowest interest rate offers will automatically be accepted. So if you want to ensure your loan offer will be selected, it’s best to offer a competitive rate of interest.
Note that if the loan amount isn’t met during that time (so, for example, if only £5,000 out of a required £10,000 has been offered), the loan won’t go through and the business won’t be able to borrow.
It’s also worth pointing out that if you’d prefer not to hand-pick who you lend to, you can use the Autobid tool which will distribute your money across a number of businesses to limit the risk – according to your chosen criteria.
What’s more, you can currently get 2% cashback on the amount you lend. This is paid on any offers that are accepted and at the point of acceptance.
Inflation is the enemy when it comes to your savings because it attacks real returns, and reduces the purchasing power of your cash.
Funding Circle also differs to Zopa because it allows you to access your funds if you need to by selling loan parts on to other lenders. You can do this through the Autosale tool.
For other potential lenders, buying these loan parts may be attractive because the buyer will be able to earn interest immediately. In other words, by buying these loan parts, you won’t have to wait for the loan process to be completed over the 14 day period and instead, you can simply buy the loan part there and then and start earning interest.
What are the risks?
If you ask me, so far, this is sounding pretty tempting. But just how risky is it?
Each application for a loan will be assessed carefully by Funding Circle underwriters using the same information that banks use. Only established and creditworthy businesses will be accepted. Approved borrowers are then split into three risk bands: A+, A and B. Those in the A+ band are very low risk, those in band A are low risk, and those in band B are below average risk.
This enables lenders to easily see how much risk they will be taking onboard if they lend to one of these businesses.
Bad debt is expected to be at around 0.6% for band A+, 1.5% for A, and 2.3% for B. In comparison, Zopa has an average default rate of 0.7%.
The other point to note is that Funding Circle isn’t covered by the Financial Services Compensation Scheme. So unlike traditional savings accounts, the first £50,000 of your savings won’t be protected.
However, Funding Circle has put comprehensive arrangements in place for an S&P rated back-up service provider to collect and service loans if required. So if Funding Circle ceased trading, lenders would continue to receive their repayments from borrowers each month. You can find out more about this on the Funding Circle website.
Are there any fees?
At the moment, the Funding Circle service is fee-free for lenders. However, from 2011, lenders will have to pay a 1% annual servicing fee. This is based on the amount outstanding on each loan part and is collected whenever a borrower makes a payment to you each month. There will also be a 1% sale fee if you sell a loan part. This is based on the amount outstanding on each loan part you sell (providing you do sell your loan part).
There are currently no fees for borrowers, although over the coming months an application fee of £50 will be introduced. This will be refunded if the borrower accepts a loan. There will also be a completion fee of 2% of the amount borrowed (providing the loan is accepted by the borrower).
Recent question on this topic
- gaiamaterre asks:
Should I lend?
If you are interested in lending money via Funding Circle, bear in mind you will need to be a UK resident and hold a UK bank account.
Given that current high street interest rates are pretty rubbish for savers, I think Funding Circle really does offer an attractive alternative. After all, who can complain about interest rates of 6-9%? However, if you are thinking of using Funding Circle, make sure you’re fully aware of the risks involved.
For a start, make sure you don’t put all your eggs in one basket. Ensure you reduce the risk by lending to a range of businesses, rather than just one or two. Consider the risk bands carefully too – if you are really concerned about risk, only choose borrowers in the A+ band. And don’t forget, there is the chance that a borrower may not be able to keep up with their repayments. So of course, the level of return you do actually see may be affected by any such losses.
That said, if you’re sick to back teeth of high street banks and fancy investing your money a little differently, Funding Circle could be right up your street!
If you have an opinion on this topic, why not start a discussion in our Grow your wealth group about it?
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