A comparison between peer-to-peer lending and online savings accounts

The interest rate on savings accounts is still on the lower side and there seems to be no indication of an increase in interest rates by the Fed Reserve.  The rates offered by the so-called ‘high yielding savings accounts’ is as low as 1% and the savers are a disappointed lot.  This has forced some savers to move their savings out of these accounts and invest them through the peer-to-peer lending companies as well as the Lending Club where they can earn higher interest rates.  But is it fair to compare the peer-to-peer lending to the savings accounts online?

The Lending Club as well as Prosper will obviously offer a higher rate of interest than any high-yielding savings accounts when diverse loan portfolios are created.  The current rate of interest offered by banks is anywhere between 1.0% and 2.00% APY.  The average of the Lending club according to them is 9.68% APY and the average at Prosper is at 10.01% APY.

There are also the risk factors that one needs to consider while shifting from the online savings account to the Lending Club or Prosper.  The high-yielding savings accounts are regulated by the FDIC and the fed government assures that there are guaranteed returns.  This is a factor that investors will have to consider.

When large sums of money are lent to a large number of people then the interest rate is fully dependent on the repayment of loans.  Both Prosper and the Lending Club will be in a position to minimize the risk by evenly spreading out the investment risks to various borrowers.  There might however be a percentage of the borrowers who will not repay their loan amount but it could still be a more lucrative offer to give these individuals loans through these lending institutions instead of putting the money in the bank.

Money can be withdrawn without being penalized in the high-yield savings accounts.  With the certificates of deposits a small penalty is levied for pulling out the funds and turning them into cash.  Hence, investing in Prosper and Lending Club is like investing in a CD instead of the traditional savings account where money can be withdrawn at any point in time.

While investing in CD’s or savings accounts the money might sit there unless you wish to take it out.  If you have long-term plans for saving then Lending Club and Prosper would be of great help to get a better rate of return than traditional accounts.