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Earning through Interest

The concept of charging interest rates is as old as the history of banks, and is now a common concept. Banks earn their income from the interest rate spread they get from their borrowers and their savers. Banks essentially borrow money from savers to lend to borrowers.

Savers earn interest for the money they keep in the bank. However, because of the effect of inflation, savers usually lose money because the interest rates are often too low. Thus savers often have to invest their funds in assets that are higher yielding.

Risk & Return

A common concept, higher perceived risk usually requires a higher return. While it is not always the case, this is usually the norm. While saving deposits and government bonds are one of the safest assets, they also offer the lowest potential returns.

Stocks or equities are then the next level of risk/reward lever, with complex financial products such as derivatives with the highest level of risk/reward.

Peer-to-peer lending would fall in between risk/reward level of deposit / bonds and stocks. It offers higher interest rates than deposits but with less volatility than stocks.