October 22, 2021

Here Are the Best Alternatives to Traditional Bank Savings Accounts

Consumers who are saving money for vacations, home repairs or emergencies may be seeking more yield since savings account interest rates have been low for several years.

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Savers now have more options on where to save their money and receive higher interest rates. PayPal recently announced it will offer a savings account at 0.4% interest so you can avoid transferring money between your digital accounts and traditional savings accounts.

While keeping money in a bank seems like a safe option, there are other alternatives that also provide protection for consumers and help you grow your funds. With the higher rates of inflation, your money actually is losing value in a savings account since the national average interest rate is 0.06% while inflation is around 5%. There are other safe options that pay a little more and some riskier options that could pay a lot more.

Here are five alternative choices to obtain a higher interest rate.

Online Banks and Apps

What it is: Online-only banks do not have brick-and-mortar locations and generally offer higher interest rates.

Best features: You can deposit physical checks via their apps and link these accounts to more traditional ones. Many of them also offer access to direct deposit paychecks two days earlier.

Drawbacks: Online-only banks typically just provide checking and savings accounts and do not offer products such as money orders.

Ally Bank and Marcus by Goldman Sachs pay 0.5% in their savings accounts, while American Express, Discover and PayPal pay 0.4% on all balances. Their savings accounts have no monthly fees and no minimum balance requirements.

Consider leaving a no-fee account open at a local bank or credit union so you can deposit cash or if you need cashier’s checks, says Leslie Tayne, a Melville, New York, attorney specializing in debt relief. Some physical branches also offer services that online-only banks simply cannot, such as safe deposit boxes and notary services.

“Getting into the habit of saving money is easier when it’s automated,” she says. “Create a recurring automatic transfer from your checking account to your online savings account each time you get paid and watch your money gradually grow without lifting a finger.”

“One strategy is to put part of their savings with traditional brick-and-mortar institutions and park longer-term savings with these fintech banks,” says Anthony Chan, former chief economist at JPMorgan Chase & Co.

CDs

Best features: Savers might choose CDs because they provide the same interest rate over a designated period of time, from as little as a month to five years or more. People allocate money into CDs to receive a slightly higher interest rate than what a regular savings account pays.

Drawbacks: Interest rates are extremely low currently and will remain so until the Federal Reserve raises rates. Also, you usually can’t withdraw your money until the CD term ends without incurring a penalty.

Cash Management Accounts

What it is: Cash management accounts, which usually are federally protected, are often offered by brokerages such as Interactive Brokers and Fidelity.

Best features: They provide traditional banking services such as bill pay and a debit card, reimburse ATM fees and may not require minimum balances.

Drawbacks: The interest rates are often low and range from 0.01% to 0.3%.

Peer-to-Peer Lending

What it is: Investors in peer-to-peer lending provide money to a platform that supports personal and business loans.

Best features: Launched in 2006, Prosper was the first peer-to-peer U.S. lending platform and has issued more than $19 billion in loan funding to about 1.1 million borrowers. Investors can open an account for as little as $25. Interest rates on loans that originated since July 1, 2009, averaged 5.5% and pay a 1% annual loan servicing fee.

Drawbacks: The length of your investment may range from three to five years. In exchange for a higher interest rate, you likely must give the lending platform your money for a longer time.

This option offers higher rates of return that can reach as high as 10%, but the risk is much greater because these are unsecured loans that a saver makes to others with credit scores that may be as low as 600, Chan says.

“The good news is that savers can diversify and buy small parts of a given loan and when investing, the saver could potentially be investing in many loans to minimize risk,” he says. “With unsecured loans and no FDIC guarantee, there will be a risk of losing principal when making these high returns. Consumers should treat these peer-to-peer loans as an investment rather than as a place to park short-term savings.”

Low-Risk Investments Like Treasurys or Bonds

What it is: Lower-risk investments such as Treasurys or government bonds are backed by either federal or state government, lowering the odds of default.

Best features: The interest rates are higher than online-only banks. The 30-year Treasury is 2.08% as of Oct. 6.

Drawbacks: The interest rates are much lower than the rate of inflation. Investors should have a diversified portfolio of stocks, bonds and other assets.

“Treasury bonds are yielding about (2.25%) at the moment, which may not be enough to keep up with long-term inflation rate averages,” says Bruce McClary, senior vice president of communications for the nonprofit National Foundation for Credit Counseling. “While the risk may be low, so is the rate of return.”

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