Investors are always looking for ways to make their money work for them. We should all learn a thing or two from them about that. It makes no sense to keep your money under your mattress. Putting your money in a bank account isn’t that much better either. Sure, it’s safer, but you’re losing money, as $100 now won’t buy you the same amount in a few years, due to inflation.
So what are we to do with our extra money? How about an interest earning online savings account? Years ago this was a popular option, as rates were at over 5% for a fully FDIC insured account. But now you’ll be hard pressed to find anything higher than a measly 1%. CD’s (certificates of deposit) are at about the same rate too. How about the stock market? Well you won’t have any luck there, as overall the stock market has been going down and is extremely volatile.
With interest rates at an all time low and a bad economy hurting businesses, it has become difficult to earn a return on your money. Yet investors are still finding a way to make money. They are doing it via peer to peer lending.
Peer to peer lending companies like Lending Club offer loans ranging from $1,000 to $35,000 and investors can fund the loans. As an investor, you can choose to invest as little as $25 per loan. This means that you are spreading out your risk across many different loans. So if someone defaults, the interest earned on the other loans will make up for it.
The loans offered are 3 or 5 year loans with interest rates ranging from about 7% to 20+%. The higher the credit score the lower the interest rate. With banks tightening their restrictions many are finding p2p lending sites as their last recourse. By eliminating the need of a central bank, Lending Club can offer lower rates. It’s a win-win for everyone involved.
Typically borrowers use Lending Club to consolidate their debt into one payment at a lower interest rate. It makes sense that if someone has three credit cards at 20% interest that it would be wise to pay all of those off and just get one new loan at a lower rate. Others use the loan to do major home upgrades, start a new business or pay off medical bills.
While it sounds risky to invest with complete strangers, Lending Club says that only 3% of their loans default and they only approve about 10% of all borrowers. A good strategy for a beginner is to start small, invest only $25 per loan and only invest with those with pristine credit scores. So if you have some extra money laying around, get it out of the mattress and into Lending Club.