Are you fed up of all the same old problems with banks? Dismal interest rates, needless charges, poor customer service… the list goes on. You’ll be happy to now then, that you don’t have to put up with it: There are actually some very viable alternatives. Here are our top five favourite savings alternatives.
- Peer-to-peer lending
- Friendly Societies
- Credit Unions (CUs)
- National Savings & Investments (NS&I)
- Better safe than sorry
Peer-to-peer lending has exploded onto the scene in the last few years, and is growing increasingly popular as we fall out of love with the banks. It is effectively an online financial exchange, cutting out the middlemen – the banks – and putting together people who want to borrow from, and lend to each other.
There are a number of different sites which provide this service; Zopa, YES-Secure and Rate Setter offer borrowing and lending for individuals, while Funding Circle is for individuals to lend to small businesses.
By joining you can either become a lender and make interest on your savings, or you can be a borrower and borrow money from other members.
So – how does it work?
In the simplest terms, what happens is this: As a lender you decide how much you want to lend, for how long and who to – borrowers are categorised by risk, so you can weigh up how much risk you’re prepared to take versus how large a return you want.
As a borrower you sign up and browse the loans on offer, selecting those which suit you and are set a rate and time scale you’re happy with.
Rates and fees
Zopa charges borrowers a transaction fee of £130 which is paid up front when the loan application is agreed. Lenders are charged a 1% annual service fee.
YES-Secure charges lenders an annual fee of 0.9%, and borrowers are charged an application fee of £5 and a fixed arrangement fee of £80.
Rate Setter charges lenders 10% of the interest they receive, while borrowers pay £5 a month for a rolling loan and £115 up front for a three year fixed loan.
Funding Circle charges lenders a 1% annual service fee, and for business loans borrowers pay an arrangement fee of 2% for a one year loan, 3% for a three year loan and 4% for a five year loan.
Is it safe?
Everyone who wants to borrow money through these sites is identity-checked, credit-checked and risk-assessed, in the same way they would be if they were applying for a loan at a bank.
To diversify any risk, lenders’ money is spread across a number of borrowers, so if one of your borrowers does default on their repayments, it won’t cause as much damage to your investment.
If a borrower does default, a collections agency chases any missed payments on the lender’s behalf – the same process that banks and other financial institutions use.
Rate Setter works differently however. On their site you lend to one individual only, but they guarantee to reimburse lenders should their borrower default.
Lenders are given an estimate of the bad debt they are likely to experience. This means you can take it into account when you set your rates.
Both lenders and borrowers’ money is transferred and held using a major UK bank account, so it is protected in that account.
To find out loads more about peer-to-peer lending, and which of these sites will be right for you, see our article here.
There aren’t many credit unions in Britain, mainly because of restrictive financial rules in the past, but they are big in America, Ireland and several other countries.
As the rules for Credit Unions in this country have improved, they have been able to increase the services they offer.
They’re particularly good for people on low incomes who want to save or borrow small amounts – but many are getting bigger and they now offer a range of services including current accounts, Christmas savings, mortgages, savings accounts, children’s accounts, mini cash ISAs and fixed-term savings.
Some credit unions also offer the Argos card, which gives an extra 5% on your savings when they’re spent at Argos.
How do they work?
The way they work is that they are set up and run by a group of individuals who have something in common – for example, they live on the same estate or they do the same job (nurses’ credit union, cab drivers’ credit union).
They’re basically financial co-operatives and they offer a low-interest and easy-to-use saving and borrowing method for their members.
So – they’re somewhere between a bank and a co-operative. They are owned and controlled by their members and run for the benefit of their members. Everyone pools their savings together and this money is used for the loans.
They’re usually thought of as organisations for people on low incomes but, if you’re a saver, the rates of return are often higher than those offered by the main banks.
It’s also pleasant to know that profits on your transactions aren’t being pocketed by City fat cats. Not only that, but they’re pretty great for learning new skills while being involved with like-minded people.
The three main aims of a credit union are:
- To encourage its members to save regularly
- To provide loans to members at very low rates of interest.
- To provide help to members in need of cash help and advice.
Want to know how to set up your own credit union? Visit the Association of Credit Unions, find out how and contact other like-minded people who also want to set one up in your area.
Friendly Societies have been around since the Industrial Revolution and were originally set up to help factory workers save a little for retirement and have some back up money in case of injury of sickness. There are now about three hundred left across the UK.
Most Friendly Societies sprang up in local communities and were exclusively for local residents. Although today some remain small and local, others have expanded to offer services to people across the UK.
The societies focus on helping members with savings, health and life insurance, pensions and annuities. Throughout their development, different societies have often chosen to invest more in one area and therefore become specialised in that area, offering fewer other services. Because of this you can’t always choose your local society and need to explore what each one offers in terms of products.
How do they work?
They work in a similar way to Credit Unions and Cooperatives. To become a member you either pay an annual fee which entitles you to all member benefits, or you get free membership when you buy a financial product from the society (including when you get a savings account).
There are no shareholders in a Friendly Society. So when you invest your money, they use it to help other members when they are in need of help. Plus, any profits made are reinvested into the society to provide the products they offer to members.
Member benefits include:
- Organised social activities
- Savings and discounts at big retail names
- Discretionary grants for members in special circumstances (although you have to have been a member for more than six months to claim these)
- Illness or Disability support
- Legal Advice and identity theft support
- Educational grants
- Will writing service
Because Friendly Societies do not provide typical loans and mortgages, they do not have bad debts. This means that there is far less risk involved so your money is safer. However as usual, lower risk means lower interest, so you probably won’t be bowled away by the rates.
They are, however, very good for Children’s trust funds.
A few of the bigger Friendly Societies are:
- Foresters Friendly Society
- The Children’s Mutual
- Shepherd’s Friendly Society
- National Deposit
National Savings & Investments (NS&I) has always been totally backed by the Treasury. You’re offered a 100% guarantee that your savings will be safe with no overall limit on how much is guaranteed.
Its savings rates, though tax-free, are generally lower performers. That said, they are not always at the bottom of the rung and if it’s peace of mind you want most of all, their accounts are a good option.
It’s not going to earn you any interest and we definitely wouldn’t advise stashing your life savings in it, but some people like to keep cash at home in a safe. As long as it’s well protected and you’re sure you home insurance policy covers the amount of cash you’ve stashed, then it is another option.
Instead of forking out a small fortune on a miniature Fort Knox, go for the more cunning variety of safe instead. You can get all sorts of cleverly disguised safes, from baked bean cans to candles and dictionaries. Check out the range of decoy safes at the Safe Shop.
Just remember, you won’t earn any interest by putting money away like this – so always weigh up the advantages and disadvantages.