Updated 05/03/2013 05:00 AM
Money Matters: Peer-to-peer lending can help investors' accounts grow
Money tends to not grow in savings accounts nowadays, and some people might earn more by lending it out online. Tara Lynn Wagner filed the following report.
To view our videos, you need to
install Adobe Flash 9 or above. Install now.
Then come back here and refresh the page.
These days, the money in a savings account is probably earning about as much as it would under a mattress, which is why personal finance expert Jordan Goodman of MoneyAnswers.com and the author of "Fast Profits In Hard Times," has been loaning his own money out through a process called "peer-to-peer lending."
Investors open an account with a company like Prosper or Lending Club, deposit an initial amount, like $1,000, and browse a list of borrowers looking for loans.
"They actually tell you a little story about why they are borrowing the money. 'I just had a wedding' or 'I'm starting a small business,'" says Goodman.
According to Brad Pattelli, the chief investment officer of Lending Club, "Two-thirds of the borrowers are just refinancing higher interest rate credit cards."
Investors essentially build a portfolio by funding loans in small increments of $25 or $50 a pop. That amount is then pooled with money from hundreds of other investors and the loan is issued to a borrower at an APR based on their level of risk. The higher the risk, the higher the investor's potential return.
"Conservative would have a very high credit score, almost no chance of default, the yields on those are about 6 to 8 percent. And then the aggressive, where they might not have very good credit scores, the yields on those is about 16 to 18 percent," says Goodman.
Those yields certainly sound appealing but there are some things to consider. For one, the loans are not FDIC insured, meaning if a borrower does not pay, the investment is gone.
However, Pattelli says borrowers are screened and defaults are rare, currently about 3 percent of the company's overall portfolio.
"Our borrowers have almost 15 years of credit history, so again, they are very responsible. These are all prime and super-prime borrowers, we don't do any subprime lending," says Pattelli.
Another consideration is the money is not liquid, since loans have a three- to five-year repayment schedule. But Goodman says investors who do not need their money right away and want it to grow a little faster can benefit from peer-to-peer lending.
"Yes, you may have a few defaults, but most of the people pay on time and the end result is you get a much higher yield than you certainly would a treasury bill or CD or money market fund earning zero today," says Goodman.