Term deposits have long been a popular option for Australians who want a safe investment harbour for their savings. But now that interest rates on term deposits have started to slide, many investors are wondering if there are better options out there.
How, exactly, can you get the most bang for your buck?
If you’re a perennial term-deposit investor, here’s some sobering news: interest rates on term deposits have been slowing down ever since they peaked back in July 2023, and this downtrend trend is only expected to continue.
The rates might still look half-decent when compared to what was being offered a couple of years ago, but they’re starting to fall short of the returns many Australians expect, especially in a high-inflation environment.
So what’s the alternative? You might want to start looking at private credit investments. With returns in the vicinity of 10 per cent, private credit funds are turning the heads of savvy investors who are willing to look beyond the safety of term deposits.
What exactly is private credit?
Private credit refers to loans that are given by non-bank lenders, usually through private credit funds. Think of these funds as places that pool money from investors and then lend it directly to businesses or property developers, usually at higher interest rates than what the banks are offering. Unlike traditional bank loans, private credit loans don’t come from deposits but from capital raised by the fund. It’s a structure that allows for much more flexibility for borrowers, while investors have the chance to earn much higher returns.
The appeal of private credit is simple: you’re lending your money at a higher interest rate, which means a higher return. While term deposits might have a fixed rate of 4 per cent, private credit is returning up to 10 per cent or more. That’s a big difference – especially when compounded over several years.
Why term deposits are falling out of favour
For years, term deposits have been a go-to for Aussie investors looking for low-risk, reliable returns. But as interest rates on these products dip, their appeal is starting to wane. Sure, they’re safe. Term deposits are protected by the government’s Financial Claims Scheme, which guarantees up to $250,000 in deposits perzaccount holder per institution. But in exchange for that safety, you’re burdened with a lower return. And with inflation running hot, even the best term-deposit rates aren’t keeping up with the rising cost of living.
Let’s say you lock in a one-year term deposit at 4.3 per cent. You’re barely keeping pace with inflation at this rate, and your real return (after accounting for inflation) could be next to nothing. So ,while term deposits are great for risk-averse investors, they’re no longer ideal for those who want to earn a substantial income from their investments.
The case for private credit
Why, then, should you consider a riskier option like private credit over term deposits? It’s simple: higher returns. Private credit funds are delivering returns of more than double the rate of term deposits. And with interest rates expected to stay elevated for the foreseeable future, these returns are likely to remain competitive.
Beyond the attractive returns, private credit also has a level of diversification that term deposits simply can’t match. Investing in a private credit fund means you’re spreading your risk across multiple borrowers and sectors, rather than putting all your eggs in one basket. Plus, private credit funds tend to offer variable-rate loans, meaning the interest you earn increases as rates rise, something that’s especially appealing in the current economic climate.
Of course, higher returns also mean higher risks. Private credit is far less regulated than traditional banking, and there’s less transparency around the health of the loans being issued. Some funds have been known to delay disclosing bad loans, and others charge hefty fees that can eat into investor returns. That’s why it’s so important to do your own due diligence and choose your private credit fund carefully with the help of a financial advisor.
Is private credit right for you?
Private credit won’t be the right fit for every investor. If safety and guaranteed returns are your top priorities, term deposits should still have their place in your portfolio. But if you’re after higher income returns and are willing to take on a bit more risk, private credit stands as an enticing alternative.
The private credit sector in Australia is growing fast, and while it’s loosely regulated, many investors are being drawn to the strong returns. With term deposit rates continuing to slide and inflation eating away at real returns, private credit might just be the answer you’ve been looking for. At the very least, it’s worth taking a closer look
