As with other money-making vehicles in this economy, high-interest savings has taken a major plunge. It’s still much higher than what I was earning before, but it’s not the impressive 4% returns that we were seeing even a year back. Because of its dip, some people are looking for other options to make their money earn money.
Recently, Debt Kid wrote about moving some of his savings to the Lending Club. That got me thinking about why the Lending Club and other Person to Person (P2P) lending companies are not actually a replacement for high-interest savings.
1. With P2P lending there is no guarantee your money will be returned.
When you give a bank your money, you’re essentially guaranteed to get back the amount you put in. Even if the bank fails, they should have FDIC insurance (and you should make sure of that before you give them your money). Your money will be covered up to a certain point.
Lending your money may go off without a hitch, but you also may end up with a loanee who is unable or unwilling to pay you back and defaults. Even collections agencies may not be able to get your money back. For savings this is a very bad thing. Savings aren’t the stuff you risk, that’s investments.
2. With P2P lending there is no guarantee you’ll have access to your money.
One of the best things about high-interest savings is that you can get your money if you need it. Even CDs will let you have your money back, albeit with a possible withdrawal penalty (depending on how far you are into the term).
With P2P lending, your money is actually gone until it’s paid back. So P2P is a dangerous place to put money you think you may need. In fact, it’s recommended that money you may need in the next 10 years not be in high-risk investments at all–but in something safer like CDs, money market funds/accounts, etc.
3. The point of having savings is not to earn money on them.
There’s nothing wrong with earning money on your savings, it’s awesome. But that’s not their primary purpose. Savings accounts are places where we should be able to safely store our accumulated money as an emergency fund, a financial backup, or for something in the future. High-interest savings accounts may have spoiled us a bit by raising our expectations. Given this economy, it’s a good thing that our money is there to begin with!
When you’re risking your savings because you want to make more on them, it’s time to re-evaluate why you’ve designated this money as savings. Should it be investing money? If it’s money you may need in the next few years, should it stay in lower-risk money tools like FDIC-backed CDs, money market accounts, and savings accounts?
What P2P lending is good for…
I’m not writing this to knock P2P lending. I just want to add a voice of temperance. P2P lending is an investment vehicle. It’s meant to be part of your investment portfolio. And it’s an interesting concept, one which might earn more on your investing money right now than other investing options. I haven’t used it myself, but I can see how it could be mutually beneficial for those who need (and can repay) loans and those looking to diversify.
At its core, P2P is investing. If you wouldn’t put your savings into stocks, don’t put them into P2P. Both have the same potential for loss, and if you don’t want to invest in stocks then your risk tolerance for this particular money isn’t high enough for P2P either.
I hope that high-interest savings will rebound over the next few years. As it is, I’m just glad to have the money in savings and glad that it’s earning more than it did at my old savings account anyway.