P2P Loan (Peer-to-Peer Loan) Advantages Over CDs

Posted by Mike Smith :: July 11, 2007 @ 7:47 am

One of the first places people look when they want a better rate of return on their savings is to their nearest bank. The product of choice for these people tends to be a certificate of deposit (CD).

If you’re in this situation, the first thing to say to you is “Congratulations!” because you’re taking a positive step to improve your financial situation. The second thing to say to you is “You can do better than a CD!”

CDs are a safe investment, federally insured through the Federal Deposit Insurance Corporation (FDIC). They also offer better rates than a typical savings account. For those few advantages, certificates of deposits have many disadvantages compared to Lending Club.

The main selling point of CDs is usually their interest rates. While the rates are typically better than a savings account, they aren’t nearly as good as the rates available through Lending Club.

A recent survey of commercial banks found the average interest rate of savings and money market accounts to be 3.67%, 1-year CDs to be 3.79%, and the top five CDs in the 6-month to 3-year category to be 5.31%.

Lending to borrowers with credit ratings in the Lending Club “A” Portfolio category has historically yielded returns of 6.95%. Rates for the “D” and “F” portfolios have historically yielded 9.31% and 11.68% respectively.

Another disadvantage of CDs is that your money tends to be tied up quite restrictively. During the term of your CD, you typically receive only periodic interest payments. Stiff penalties apply if you attempt to retrieve your principal before the end of your term.

Monthly payments that you receive on your Lending Club loans include both interest and a portion of your principal. It is worth noting that banks tend to advertise the interest offered on five-year CDs. Lending Club’s loan term is only three years.

An additional restriction of CDs is that many tend to require a minimum investment of $10,000. To start investing in P2P loans with Lending Club, you can begin with as little as $1000 to apply to a diversified portfolio of loans. Individual loans that you make can start at $25 and amounts can be increased in $25 increments.

Despite lower interest rates, higher minimum investments, and longer period before the principal starts to be repaid, many people still invest in CDs. The more informed investor, who knows a superior alternative when he sees one, will consider Lending Club.