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P2P investing could earn you higher returns

P2P investing could earn you higher returns

Down, down, interest rates are down. That’s great news for borrowers, but not so much for savers.

Since the Reserve Bank reduced official interest rates three times in the past six months, it’s become hard to find a term deposit or savings account paying more than the inflation rate of 1.7 per cent.

And if you’re earning less than 1.7 per cent, you’re actually losing money in real terms.

Want to earn higher returns? You can get a better return on investment with property and shares, although there’s also a chance you might lose money. But you probably already knew that.

However, there’s another investment option you might not have heard of – peer-to-peer lending.

The potential benefits of P2P investing

Peer-to-peer lending involves private individuals lending money to other private individuals, via a third-party platform. All three parties benefit in different ways:

  • Investors (i.e. lenders) generally aim for an interest rate that is higher than they would get from a term deposit or savings account
  • Borrowers generally aim for an interest rate that is lower than they would be charged by a standard personal loan or credit card
  • The peer-to-peer lender takes an interest margin fee for facilitating the transaction

For example, here are the returns you could earn by investing through RateSetter, one of a number of peer-to-peer lenders in Australia:

Product

Term

Per-annum return after fees

1 Month Rolling

1 month

3.0%

3 Year Income

3 years

4.1%

5 Year Income

5 years

7.4%

National Clean Energy

7 years

6.4%

* Data accurate as of 20 November 2011

The potential risks of P2P investing

As a general rule, investing involves a trade-off between risk and reward:

  • Chasing a higher reward generally requires you to take a higher risk
  • Taking a lower risk generally means accepting a lower reward

Investing through a peer-to-peer lender involves some risk. Risks may include:

  • The borrowers may default on their loan – if that happens, you might lose some or all of your investment
  • Investments are not protected by the Financial Claims Schemeif the peer-to-peer institution collapses, the government guarantee will not apply
  • Your money may be locked away throughout your term – depending on the peer-to-peer institution, you might not be able to access your funds during the loan term

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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