An innovative way to earn 8.2% on your cash!

With savings rates still very low, it's time to think outside the savings box. Szu Ping Chan assesses two sexy alternatives to the traditional savings account.

Auctions are big business these days. You can now bid for a home at auction, a car, and, as I wrote just this week, even your next holiday.

But have you ever thought about someone bidding for your hard-earned cash?

Two new players on the block

Six months ago, we wrote about the launch of a new money auction website, MaxBips, which provided you with a new and innovative way to earn interest on your cash.

Instead of paying your money into a bank account, you tell MaxBips how much you're willing to deposit, and how long for.

Bidding then opens for 30 minutes, in which time a range of FSA-authorised banks will tell you the interest rate they're willing to offer you for it.

Once the auction is over, all offers on the table are presented, and you have the freedom to choose who you want to house your money with. However, there's no obligation to hand your money over to anyone, even after bids are revealed.

But MaxBips isn't the only one getting in on the act, and this week, rival site Licuro.com opened its virtual doors for business.

Licuro has operated in Denmark since 2002, and has received more than £2.2 billion from 8,000 investors to date.

Licuro's backers are mainly from the Danish financial sector, and its client list in Britain includes Saffron building society and Bath building society, together with a number of Danish banks.

What are the rules?

Firstly, you need to have cash. And lots of it.

You must have at least £30,000 to save through MaxBips, and at least £25,000 to use Licuro (though to gain access to the best rates, it says you'll need to deposit more than £50,000).

There are also subscription fees, and once you've registered, you'll need to decide whether you want to sign up for one year, which costs £33.55 with Licuro, or on a pay-as-you-go basis, which costs £5.75 per auction. Until August 31, Licuro will give you your first online auction free of charge.

MaxBips has an annual fee that ranges from £49 and £149, depending on how much money you have to save, and how many auctions you want to hold.

What returns will I get?

Every auction is different, so rates will vary between providers, but the general rule of thumb is the more you have and the longer you are prepared to lock away your cash, the better your returns will be.

On a deposit of £50,000 over a term of one year, MaxBips estimates a return between 0.62% and 3.7%, while Licuro give you an average rate of 2.43%.

Many of you will probably have just raised your eyebrows at these mediocre rates.

After all, just this month we told you how you can earn 3.15% in an instant access account, and how some accounts pay 5.4% AER if you're willing to lock your money away for five years.

For a more direct comparison, the Post Office One year growth bond 3.85% on its one year bond, and you only need £500 to qualify. This is a better return than the rates offered by the money auction sites, without the need for large sums of cash.

In defence of the auction sites, the rates you will be offered will fluctuate depending on banks and building societies' demand for cash deposits.

So while your cash may not appeal to the banks one day, it may be in high demand the next, and you may get a better rate on your cash if you play your cards right.

Or... you might not.

Lend to save

So, if you don't like the sound of these auction sites but you don't fancy just handing your cash over to a bank, what are your options?

Well, why not cut out the middleman and lend direct to real people instead?

Zopa is a financial matchmaking site where potential investors meet borrowers in Zopa's money marketplace.

The result? Borrowers get better rates than on the high street, and lenders make a better return than they'd get from a traditional savings account.

You can lend from £10 to upwards of £25,000, and choose a term of either three or five years. You can also decide on the level of risk you're comfortable with, from A* rated borrowers to those with a less perfect credit record.

Of course, nothing comes free, and you'll pay a 1% fee on any money lent via Zopa.

Zopa still says that its lenders make an average return of 8.2% after fees (but before bad debt is taken into account).

Safety net

When we're talking such large sums of money, one of the first questions that probably comes to mind is: how safe is my cash?

Licuro and MaxBips only deal with banks authorised by the Financial Services Authority (Licuro works only with Danish banks authorised by Finanstilsynet, or the Danish FSA equivalent), which means that up to £50,000 of your cash is covered under the Financial Services Compensation Scheme should anything go wrong.

The deposit scheme in Denmark is even better. In the midst of the financial crisis, they promised to cover all deposits until 30th September 2010.

After this, up to DKK 750,000 (approx. £85k) of your cash will be covered.

Zopa works in a slightly different way. As you're dealing with individuals and not a bank, from time to time there may be someone who misses a payment. In the past 12 months, 0.27% of its borrowers have defaulted on payments. The year before that, the default rate was 1.27%.

This is still pretty low, and Zopa  assures me that all potential borrowers are put through a stringent credit and identity check, which sorts the good and bad from the ugly.

But to spread the risk, your money will be spread among several borrowers. If you lend £500 or more, Zopa will spread this money among at least 50 borrowers.

What I think

With MaxBips and Licuro reserved for the high rollers among us only, for now at least, I'll be sticking to traditional savings accounts.

But I've been tempted to dive into the Zopa  lending pool for years, and with savings rates much lower than they were a year ago, perhaps I'll dip my toe in soon. After all, with savings rates so low, it's time to get creative!

More: Get a better rate on your fixed-rate savings / How to choose a savings account