Lending Your Money
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Unlike lending your favourite jumper to your BFF, lending money – to a bank, company, government or even another person - is virtually guaranteed to come back to you with a better return to boot. It’s a basic concept: You give them money and as a ‘thank you’ they pay you interest. You’ll get higher interest payments if the term of the loan is longer and/or the organisation you’re lending to is “riskier”.
Talk me through the risks
They’re low compared to other investments. That’s why lending money is dubbed a low-risk investment. It comes with a promise to pay fixed interest and your invested money will be returned at the end of the term. You can lend to anyone but if that person or place goes bust you risk losing out. However, most regulated ways of lending have some assurances in place (more on that later).
So who should I lend to?
We suggest to avoid doling out cash to your long-lost aunt or someone you recently met online. We can’t guarantee you’ll make interest from this. We can, however, from one of these three regulated ways:
Lend to a bank… You deposit your money into a fixed-term saving account, aka fixed rate bonds. Simple right? Your money will be tied-up for a fixed amount of time – you get to choose from 1,2,3 or even 5 years. In return you’ll get interest rate payments, usually once a year. The longer the term, the more interest you’ll rack up. But take note: You’ll be penalised if you withdraw money before the end of the term.
Peer-to-Peer lending… This type of lending is fairly new to the UK. It works in a similar way to fixed-term saving accounts but the service is not provided by a bank. Instead it’s offered by companies who act as the mediator between people willing to lend and those that need a loan. Again, the longer you’re willing to lend the more interest you’ll end up with. And you’ll be penalised if you withdraw money before the end of the term too.
Buy a Bond… You lend your money to a company or government and they pay you interest, usually twice a year. Unlike saving accounts and peer-to-peer lending you can sell your bond before the end of the term if you need your money back sooner. But, if you sell early you’ll either receive more or less than your initial money invested depending on how well the bond performs. You can buy or sell bonds online using a stock broker.
How do I choose?
Before you fork over a load of cash, check out the pluses and minuses of each way to lend. MOXI’s rule to remember: The safer the loan conditions, the less interest you’ll get in return.
Stashing your cash in a fixed-term account is the safest route but, in the current climate, interest is low. You can get up to 1.55% for 1 year lending (that’s £155 for every £10,000) through to 2.00% for 5 years lending (£200 for every £10,000). It’s not exactly the fastest way to boost your bills but there is a plus side: Money deposited in a UK bank account is insured. So, if the bank goes bust, up to £85,000 is protected under the government’s Financial Services Compensation Scheme (FSCM).
Lending via a Peer-to-Peer platform does not come with the FSCM stamp. However, a decent platform will offer protection provided by a provision fund which is there to cover any shortfalls in loan repayments, such as ratesetter.com and zopa.com. You’ll get 1.9% for 1 year lending (that’s £190 for every £10,000) and 4.8% for 5 years lending (£480 for every £10,000).
Buying bonds means you can lend to a whole range of large to medium-sized companies and governments around the world. The benefits are the wide selection and ability to get out early. The downside is that you need some financial know-how, but we have a guide for that.
1 Year Lending Rates Comparison:
|Yearly Interest Rate
|Earnings per £10,000
|Bank Saving Accounts
|0.70% to 2.00%
|£70 to £200
*Based on yeilds-to-maturity recorded on 23rd May 2017. Changes daily. Why? Read our guide Buying Bonds.