What is compound interest and how can it boost your earnings?

Whether you’re investing for your retirement, a new home or your children’s future, compound interest can help you reach your financial goals faster. It’s effect means that even small changes in what you put away each month can make a huge difference to your earnings over time. To help you understand how, we take a look at how it works and what it could mean for you.

What is compound interest?

Compound interest can help boost your earnings over time. Here is a basic example of how it works.

Say you have an investment of £10,000 and earn interest at 5% per year, your balance would go up as follows:

Year 1

Interest added = 5% of £10,000 = £500

Total balance = £10,500

Year 2

Interest added = 5% of £10,500 = £525

Total balance = £11,025

Year 3

Interest added = 5% of £11,025 = £551.25

Total balance = £11,576.25

You can see the amount of interest that gets added each year goes up, as you are effectively earning interest on your interest. This is what is meant by compound interest.

Regular contributions can help accelerate your earnings

Naturally, putting money aside each month means you’ll have more in your account. However, regular payments will also help you earn more interest. The more money there is in your account, the more interest it will gather, and the more compound interest you’ll earn on top of that.  

If you started with £10,000, here’s an example of what you could earn on the Balanced lending option with regular monthly payments:

Compound interest table

As you can see, the amount of interest you could earn goes up rapidly with bigger monthly payments. A simple way to make regular payments into your account is to set up a standing order. Find out how here.

Think long term for bigger returns

When you start to look long term, compound interest can help your earnings grow exponentially. The difference can be really quite remarkable. Here’s an example of what you could earn on the Balanced lending option if you started with £10,000 and added £100 each month: 


20-30 years may seem like a long time, but if you’re planning for your retirement or a nest egg for your children, it may be a realistic timeline. The sooner you start, the sooner you’ll start benefiting from your compound interest.The increases in what you could earn get bigger and bigger over time. This is all thanks to compound interest. By earning interest on your interest over many years, your earning potential rises dramatically. After 16 years you could have doubled your money. After 30 years, you could have more than tripled it.

Keep lending switched on

When you receive repayments from businesses, our lending tool will automatically lend them out again to other businesses. By keeping lending active, you’ll be able to gain even more from compound interest. All you have to do is keep lending switched on for your account. If you have lending paused, you can start lending again from the Lending settings page of your account.

To add funds to your account login here, or learn how to set up a standing order.

Enjoy lending!

These figures are estimates based on lending an initial £10,000 through the Balanced lending option, earning a return of 6% per year. They were calculated using a compound interest calculator. The projected return for the Balanced lending option is 6-7% per year after fees and bad debt, but before tax. Your actual return may be higher or lower. Please note, forecasts are not a reliable indicator of future performance and your capital is at risk.

This blog is a general summary, and should not replace financial advice tailored to your specific circumstances. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice. If you have any questions, please speak to your professional advisor or seek independent specialist advice.

 

How to earn a more stable return with diversification

We want to help you get the most from your account and earn attractive returns. One of the best ways to earn a more stable return is diversification. Check out our infographic to find out what diversification means and how it works, or read our summary below. 

What is diversification?

Diversification is a way of spreading your risk. It’s basically a fancy word for saying “don’t put all your eggs in one basket”.

At Funding Circle, this means splitting your investment into lots of small pieces, then lending them out to different businesses.

Why is it important?

As an example, say you lent £2,000 all to just one business. If they were unable to repay their loan, you could lose all of your money in one go.

Instead, if you were to split your £2,000 across 100 businesses, you could then lend just £20 to each. Then if one or two of them couldn’t repay, you would only lose a small amount.

You would still have a great chance of earning a good return overall.

What do I need to do?

To help, we’ve made diversification easy. Our automatic tool will help you lend your money in small amounts to lots of different businesses.

We suggest lending £2,000 or more, as our lending tool will then spread your funds across at least 100 businesses, with no more than 1% going to each one. Everyone who has diversified like this for a year or more has earned a positive return. 98% have earned 4% or more.

To lend £2,000 or more and diversify your account today, simply login to your account.

Past performance is not a guarantee of future performance, and by lending to businesses your capital is at risk.

Enjoy lending

Unsecured loans vs secured loans and what is a personal guarantee?

Unsecured loans explained

Welcome to our new Explainer series, where we’ll be helping you understand common phrases in more detail. We want to help clear up any terms you’re not familiar with, so you can make informed decisions on which loan is right for you.

First up we’re taking a look at personal guarantees and the difference between secured loans and unsecured loans. Looking from a borrower’s point of view, below we outline what the terms mean in general. We’ll then go into more detail on what to expect at Funding Circle.

For the most part, secured and unsecured business loans are very similar (although property loans can differ). You get a lump sum, then pay it back in installments with added interest. The key difference comes if you are unable to pay off the loan:

Secured Loans

With a secured loan, you put forward something of value as a ‘security’. This could be property, land, equipment or other assets. If you stop repaying your loan the lender could take this asset and sell it to recover the unpaid amount. The loan is secured against the asset or assets chosen.

Unsecured Loans

With an unsecured loan, you do not put forward any assets as a security. That means you don’t have to give up your property, land, or other assets if you can’t make the repayments. The lender may ask instead for a personal guarantee, or simply trust you are creditworthy enough to repay the loan.

What is a Personal Guarantee?

A personal guarantee is an agreement that the person(s) involved will cover the cost of the loan if the business is unable to repay it. Typically this is the Director(s) of the company. They become the guarantor of the loan, meaning their personal assets could be taken if the business fails or is otherwise unable to repay the loan.

Pros and cons

Unsecured loans are usually quicker to apply for as they require no valuation of assets. They are also a useful option if your business doesn’t have any high value assets that you can use as a security.

However, sometimes unsecured loans can have a higher interest rate as the lender is taking a greater risk. Being creditworthy enough to qualify can also be very difficult. Providing a personal guarantee can counter both these problems.

If, however, you would like to keep your personal finances completely separate, a secured loan may be your preferred option.

How does it work at Funding Circle?

At Funding Circle businesses borrow directly from our range of investors, including people, local councils and institutions. They provide all the capital for our loans, and if the loans they fund are not repaid, they could lose part or all of their investment.

So, to help us give investors greater peace of mind about the money they lend, we ask for a personal guarantee from company shareholders on almost all of our business loans.  

Unlike some other lenders, at Funding Circle the interest rate you have to pay on your loan will not be affected whether you choose to get a secured loan or an unsecured loan with a personal guarantee. For business loans our interest rate is determined by your risk band (although again property loans can differ). This is worked out using a number of factors such as your credit history, turnover and company finances.

All decisions regarding risk bands and the type of security required are taken by Funding Circle’s Credit Assessment team.

Looking for a secured or unsecured business loan?

You can check your eligibility for a business loan from Funding Circle in 30 seconds.