With traditional passbook savings accounts paying next to nothing in interest, more and more individuals are looking for better paying alternatives to maintaining such traditional accounts. Among the many available alternatives are paying off debt, other account options and peer-to-peer lending.

Higher Yield Money Market Accounts

One of the simplest alternatives to depositing money in a traditional passbook savings account is to obtain a money market account instead. Money market accounts are FDIC-insured just like regular savings or checking accounts.

In addition to paying higher interest rates than standard savings accounts, money market accounts offer limited checking account services. There is usually a relatively low maximum number of checks that the customer can write on the account per month, typically between five and 10. In return for abiding by this restricted withdrawal activity, money market account holders receive a higher interest rate than what is available for a traditional savings account. For example, a bank offering only a 0.02% interest rate on standard savings accounts might offer up to a 1.02% interest rate on a money market account.

In addition to the limit on monthly transactions, money market accounts usually have other restrictions as well, such as a required minimum opening deposit amount or maintaining a minimum balance. If there is a minimum balance requirement and the account drops below the minimum, then account holders may just be paid the standard, lower interest rate offered on regular savings accounts; however, some banks also charge a penalty fee. Before opening a money market or other alternative account, it's important to have a clear awareness of the restrictions that apply to the account, along with complete knowledge of any fees that the account may incur.

Certificates of Deposit

For individuals who do not expect to need access to their savings for at least a year or two, there are certificates of deposit (CDs). The longer the term that customers are willing to have their money tied up, the higher the interest rate available. One-year and two-year CDs offer up to 10 times the interest currently available on traditional savings accounts. With a little planning, individuals can spread their capital across CDs of varying term lengths to provide themselves with more liquidity in case they need to access part of their savings. CDs are FDIC-insured.

Credit Unions and Online Banks

It's often possible to obtain a higher interest rate simply by moving a savings account to a different financial institution, either one down the street or one accessed through the Internet. Credit unions operate much the same as banks, although they typically offer fewer financial services. Credit union accounts are federally insured through the National Credit Union Share Insurance Fund (NCUSIF, the credit union equivalent of the FDIC.

Credit unions commonly offer significantly better interest rates on savings accounts than banks do because credit unions are nonprofit organizations. An individual may be able to go from earning 0.02% to 1.5% simply by having a savings account at a credit union rather than at a traditional bank.

Online banks, such as Ally Bank or American Express Bank, also typically offer higher interest rates on savings accounts. They are able to do this because they are avoiding the brick-and-mortar overhead expenses of maintaining physical branch offices.

High-Yield Checking Accounts

There are high-yield checking accounts that offer better interest rates than savings accounts. Some of these checking accounts offer up to 2% annual percentage yield, in contrast to passbook savings rates of only 0.02%.

To obtain the higher interest rates, customers typically have to meet certain requirements, such as a minimum balance, establishing direct deposit or bill pay, or conducting a minimum number of monthly debit card transactions. If account holders fail to meet the requirements for receiving the higher rates, there's usually no penalty. They just receive whatever the standard lower rate is instead.

Peer-to-Peer Lending Services

Peer-to-peer lending services, usually operated through websites, have become increasingly popular in recent years. Peer-to-peer lending provides a means for individuals looking to borrow money to obtain personal loans outside of going to a bank, and for individual lender investors to earn excellent returns on investment by funding the loans with their lending account deposits. Through websites such as Prosper.com, individuals on the lending side provide loan capital for individuals on the borrowing side.

Lending accounts with peer-to-peer lenders are not FDIC-insured like a savings account at a bank, and it is possible to lose money. However, the overwhelming majority of investors are able to consistently realize annual returns in the neighborhood of 8 to 15%, with very little genuine risk. Borrowers are screened by the service and must meet certain requirements in order to obtain loans.

The feature of peer-to-peer lending that vastly reduces risk is the structure of the loans. The risk on any individual loan is spread across a large number of lender investors. Individual lenders usually fund no more than $25 to $50 of any one loan. For example, an individual seeking a loan of $2,000 for home improvements will have the loan funded by 40 different individual lenders, each providing $50 toward the loan total.

The lending service evaluates borrowers and the purpose of the loan to determine credit risk and the interest rate to be charged for a loan. Individual lender investors can select their level of risk to determine what kind of loans their money will be used to fund. Even if a single borrower defaults now and then, because the investment is spread across so many different loans, lender investors are usually able to easily earn an overall return of 10% or more. The loan default rate on Prosper.com is less than 5%, and nearly all defaults occur only in the highest-risk loan category. Therefore, lender investors who limit their investments to low- to moderate-risk loans effectively eliminate virtually all risk. The moderate-risk category of loans offers returns as high as 12 to 14%.

One of the advantages of putting money into a peer-to-peer lending account is that an individual can open a lending account with a very low minimum deposit, as little as $25 to $50, and then add money to the account monthly just as they might with a savings account.

This option is not government-insured, guaranteed income in the same way that a savings account is, but it is a very low-risk investment that offers excellent potential returns far above what a regular savings account offers.

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