The technical differences between a savings account and peer to peer investing
Eligibility, risks, liquidity and returns: the differences between savings accounts and peer to peer investing.
Peer to peer (P2P) loans are a new face on a familiar concept. As well as providing bank-beating rates for borrowers, investors can get a return above what’s on offer with traditional on-call cash investment products.
Peer to peer investing is largely out of reach for everyday Australians. As well as high capital requirements, you must fit the definition of a sophisticated or wholesale investor to get into the peer to peer market. There are, however, two peer to peer lenders open for “mum and dad” investors: Direct Money and RateSetter.
There are also differences in liquidity and risk. Savings accounts are a liquid investment, peer to peer investments are not; you get paid when the borrower makes repayments and your capital investment is fixed for a period of months or years. There’s a chance a borrower may default on a loan too, and if this happens your money is gone.
We take a look at the differences between savings accounts and peer to peer investing so you can make an informed decision about which type of investment is right for you.
How do peer to peer investments work?
P2P investments give a higher return than deposit investments. You’ll pay more on the interest you earn from P2P investing too. This method of investment allows you to deposit a lump sum of cash with the P2P lender. Your funds then sit in an account that accrues interest near the cash rate, before the P2P lender allocates your funds to different loans in accordance with your investment mandate.
|Average return||From 7.60% p.a.||From 11% p.a.||From 7.68% p.a.||From 7.7% p.a.||From 7% p.a.|
|Investment term||Up to 60 months||N/A||Up to 60 months||Up to 60 months||N/A|
|Fees||N/A||N/A||10% of gross interest||N/A||Up to 23% of gross interest|
What are the features of a savings account?
The following savings accounts give you the highest return on your investment:
|Minimum investment||Return||Investment term||Fees|
|Citibank Online Saver||$0||3.05%||No fixed term||$0|
|ME Online Savings Account||$0||3.05%||No fixed term||$0|
|Rabodirect High Interest Savings Account||$0||3.20%||No fixed term||$0|
|Bankwest Telenet Saver||$0||3.00%||No fixed term||$0|
|St.George Maxi Saver||$1||3.00%||No fixed term||$0|
Other differences between savings accounts and peer to peer investing
Retail and wholesale investors
With the exception of Direct Money and RateSetter, to invest in P2P loans you need to fit the definition of a sophisticated or wholesale investor. This includes SMSFs and trusts. Wholesale and sophisticated investors must have sound investment knowledge and enough capital to meet the minimum investment requirements. Australian P2P lenders can require millions in capital before you can start investing.
Invest in different types of loans
Debtors can either be individuals or businesses. For example SocietyOne lets you invest in secured livestock loans as well as individual unsecured personal loans.
Flexible investment options
Savings accounts are a one size fits all investment product, whereas P2P lenders give you more ways to invest your money. You’re asked to provide an investment mandate that outlines your risk appetite and preferred investment terms; you can choose to invest in borrowers with AA, A, B, C or D credit ratings for a period of two to five years. Opting to invest in borrowers with lower credit ratings for longer terms gives the highest return.
There is no secondary market for P2P loans, the contract finishes when the loan is repaid. You will receive funds every week or fortnight as the borrower makes repayments on the principal loan balance plus interest. This is your at-call balance and you can withdraw up to this amount whenever you want. Like a term deposit, when the loan matures you can choose to withdraw or reinvest your money.
Savings accounts have little to no risk compared to P2P investing. P2P investments involve the risk that the borrower will default on the loan, though P2P lenders attempt to mitigate this risk by spreading your money across multiple loans. For example, there are an average of 40 investors for each SocietyOne personal loan. If the borrower defaults, you lose a portion of your money.
The government guarantee
Savings account balances are guaranteed by the Australian government up to the value of $250,000. The government doesn’t cover P2P investments.