Term deposits on steroids: earn double the bank rates
They've been compared to term deposits on steroids and when you look at the returns you'll understand why.
Net of fees you could earn an annualised rate of 3.8% on a one-month investment (on Wednesday last week, one-month investments were netting 4.2%pa). One year gets you 4.7% and three years net of fees earns you 7.8%pa.
These are the going rates from RateSetter, just one of several peer to peer (P2P) lenders that now operate in Australia. Growth for RateSetter hit 114% over the past 12 months.
Given the best return I could find for a month term deposit was a return of 1.85% on $10,000 for a month, I'm not surprised that millennials and gen-Xers are ditching traditional saving methods and cashing in on the one-month P2P investment market.
According to RateSetter, its one-month market is the most popular with its millennial investors, 72% of whom have invested in it since the company launched in 2014.
This is ahead of the second most popular market, over one year, where 40% of its millennial investors have put their money over the past three years. This contrasts with older investors, who have a relative bias towards three-year and five-year lending markets.
The average amount invested in the one-month market has risen from $3777 two years ago to $11,483 today.
Daniel Foggo, CEO of RateSetter, says the growth of P2P lenders comes down to the fact that they have snapped up the middle ground between cash accounts and the sharemarket.
"We have reached the milestone of $150 million in loans far sooner than anticipated because we are providing much-needed competition to the banking sector.
"We are giving everyday Australians a genuine alternative to traditional investment options, offering far more attractive returns across both our short-term and longer-term markets."
If you're unsure of exactly what P2P lenders are, then think of them as as a platform that matches people who have money to invest with people who are looking for a personal loan.
Depending on the platform, fees can apply to both investors and lenders. It's important to understand that your investment is not guaranteed.
Unlike deposits of up to $250,000 in a bank, building society or credit union, the federal government does not guarantee your money if it's stashed in a P2P investment.
So before you hand over your hard-earned savings be sure to read the product disclosure statement and find out the answers to these important questions:
- What is your net return? What fees apply?
- Is your investment spread over more than one loan? (This could reduce your risk.)
- Is there a provisional fund and how much is in it? (This may help out if borrowers default.)
- What is the repayment cycle?
- What happens if the borrower defaults?
- What is your default rate on loans?
- What happens if the platform becomes insolvent?