Better Than a Bank Account: Why You Should Know About Lending Club

Livin’ the Dream…

Let the party begin!  Your ship has come in and you own something we all want: a big pile of cash.  Anyone who’s been lucky enough to experience “wealth” knows that no matter who you are, no matter how good you are with money, you cannot avoid getting those dollar-sign eyes.  Purchasing luxury items is something we all dream of occasionally but the smartest among us keeps it that way: a dream, not reality.

The smartest among us puts the money to good use.

Keep the Dream Alive: Find Your Own Mix

What’s meant by putting your money to good use is putting it somewhere safe where it can grow, where it can work for you.  Finding that place is not all that easy because you must find the right blend of safety and growth.  On top of that, each person has his or her own blend…there’s no answer that works for everyone out there.  What your uncle did with his windfall twenty years ago will most likely not be the right choice for you.  What your co-worker did with her bonus may be totally wrong for you.  The trick is to narrow the field of choices, eliminating the bad ones, and then select the method that fits your personality.

What’s Wrong With a Savings Account?

Lots these days, actually.  Are you satisfied with getting .45% interest?  What that means is if you have $10,000 in your savings account, you’ll get a whopping $45 return after one year.  With inflation, your money parked in a savings account like that will actually be decreasing in value.  So, instead of saving your money, a savings account can actually whittle away your hard-earned savings over time.  Keep your money in a savings account with low interest long enough and you’re just throwing some of it right out the window.

Sure, a savings account is safe: it’s FDIC insured.  You can’t lose it all in the stock market.  But that’s like getting kidnapped and not looking for a way to escape.  Sure, they feed you and protect you from the elements but you’re just sitting there in a dark room, all alone, not living.  Instead, you’re saying “at least I’m not dead!”

What’s Wrong With the Stock Market?

Are you really asking that?  After the recent stock market crash, when so many investors lost so much, it’s hard to argue for relying totally on the stock market to grow your money.  Sure, there will always be theories that the market always bounces back, but that’s hard to tell people who needed their investments and couldn’t wait another five years for things to right themselves.  Stocks still make a lot of us very nervous, that’s for sure.

So…Where Does That Leave Us?

That leaves us with peer-to-peer lending, actually.  Peer-to-peer lending is a way for people with cash to invest to find people who need to borrow cash.  From an online marketplace, investor-lenders can select whom they want to lend to, manage their choices, and get daily updates on loan performance.   There are only two heavy hitters offering these services: Lending Club and Prosper.  Lending Club is the real winner right now, with more loans and more popularity than Prosper.

Yes, there’s risk involved.  Just look at what you’re doing:  lending money to strangers!  But there are standards involved that reduce the risk.  Here’s what they are:

  • Required minimum credit score.  Lending Club weeds out the low credit scores, eliminating much of the risk right there.  After all, that’s how the banks do it.  The average credit score of lending club borrowers is a reassuring 700.
  • Favorable debt-to-income ratios.  Borrowers have little other debt, aside from mortgages.
  • Higher personal income.  Borrowers have a higher income than the national average.
  • Spread out the risk.  You’re lending to hundreds of borrowers, not just a few.  You can lend as little as $25 to each borrower, thereby further minimizing your overall risk.

So, with assurances like this about the borrowers, you are able to minimize risk.  Make no mistake: there is risk involved…it’s just a matter of how much risk, and the type of risk.  For many, the risk with Lending Club is far more palatable than the risk associated with the stock market.

Customize Your Lending Club Experience

Once you set up an investor’s account with Lending Club, you can personalize your mix just the way you like it.  Want to be super picky and only lend to the best borrowers?  You can do that.  You won’t get the highest returns but your money is theoretically safer.  Want to go for 26% return on your investments?  You can aim for that, too…by choosing the riskiest loans.  Who knows, many of them pan out and you can make some money.  Either you way you look at it, Lending Club is a giant step ahead of the bank.

With returns that average much higher than that sad .45% from a savings account, you are getting far more for your money.  Even if you aren’t the savviest peer-to-peer investor, you’re still doing better than the guy who still has all his cash in a savings account.


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