Interesting

Interesting was Originally Posted on September 10, 2013 by lavarock

I just did a quick check at Bankrate.Com and the best CD rate at this time is a measly 1% and you have to put in $25,000 to start.

The best Money Market Account is about 1% and you need a minimum of 410,000.

While you have to tie your money up now for 3 years minimum, would you like to be making over 8% per year? Easy!

A while back, a friend and I went to a casino in the Bahamas. They had a slot promotion going on and I noticed something odd. The casino money carts kept being wheeled to the machines and the casino people kept filling up the machines with money, a lot like a candy machine is restocked. If you know slots, that is quite unusual and meant that these machines kept paying out. With regular slots, you put money in, pull the handle and the machine takes most of your money. Oh you might win some in the short term, but generally you lose more than you win, long term.

Let’s say that you find a machine that pays out. You put in a quarter and it pays 30 cents, put in another quarter and it pays 28 cents, another quarter brings 40 cents, another brings 35 cents. You play for 20 minutes like this and all of a sudden the machine takes your quarter. Over that time, maybe you made $13 and lost $2. Would you stay at that machine? Is it called an investment if you make more than you lose?

I remind you that P2P (peer to peer) lending is still a viable way to make money. You open an account with a lender such as Prosper.Com or LendingClub.com, fund the account with as little as perhaps a couple hundred dollars and invest away. I use Prosper but just created a LendingClub account also, so my comments are based upon Prosper and a bit by the latter.

Setting up an account takes all of a minute or two. Then funding is tying in a checking account (acct number and routing number) or a bank transfer or send in a check.

When those funds appear (a couple of days) you will login and decide which loans to invest in. These sites do all the research and you decide if you think the person should have any of your money. The sites also give you the ability to invest in many loans at one time and that is a suggestion, invest a little in a lot of loans. By doing so, you limit the chances that one bad loan will hurt you significantly.

With my very conservative investment at Prosper, I am returning 8.98% per year and of the 11 loans (notes) I have invested in, not one has had a late payment or defaulted. 5 of those 11 have been paid off and some of them paid off early, limited larger interest to me. I hate it when people pay off a loan too fast

Many of these people may not have been able to get a loan at a traditional bank because they have high debts. For example a person might have $10,000 in credit card debt and be at 85% of their limit. A bank might turn them down, but I may not. I may invest $25 or more because they say they are going to take this 11% loan and pay off their credit cards which may be up at 21% interest. By then paying off the high interest cards with this loan, they immediately have cashflow and their monthly expense of debt may have just halved. Their credit score goes up because they are paying off loans responsibly.

You get to decide who to invest in, you decide how much to invest and you get interest as they pay their loan.

You are given information and statistics as to what percentage of these loans goes bad, and that information also determines the interest rate the recipient pays on the loan.

It really is a simple process and you can start with a small amount of money and test the waters. I think if you try P2P lending, you will like it. I literally have put some money in an account, fund some loans and sit back as my account accumulates interest at a great rate (compared to other ways).

With stocks, you can invest and hope that it goes up in value, but any major or minor news item could send your stock into deep water. With these loans, you have a choice, a lot like bonds. You can choose a low rick of perhaps someone paying 7% with a 1% loss rate, or take a bit riskier chance with a loan paying 27% with a 14% loss rate. That last loan category, if you chose an random number of loans would pay 27% minus 14% loss and still net you 13%. I think if you chose more carefully than random, you could get higher than that 13% return rate.

I don’t invest in loans where the person is trying to fund a wedding, honeymoon or vacation. I saw a listing where a businessman was asking for a large amount to help him buy a boat. He had lots of credit card usage, didn’t say he was paying off the cards, just buying a boat. Did he realize that a boat is a hole in the water that you throw money in? If he has to borrow to buy a boat, can he afford to dock it, fuel it, do maintenance, etc? Do the newlyweds understand that if they have to borrow $10,000 or more to get married, how can they afford to live? Why not pay off bills and save for a big honeymoon later. Those are the thought that come to me as I read listings.

Someone borrowing money for purposes not disclosed, no way! However, I will invest in some businesses trying to get going, especially if they are knowledgeable about the field they are entering. Someone who worked at a job for someone else who wants to start a similar business would be a better choice.

As I say, I’m not the savviest investor but this way is simple and you know the risks up front.