It is hard to feel thrilled with the pitifully low yield which savings accounts offer even if you follow a sensible plan of saving. One excellent way to produce much higher yields on your savings is to invest in peer to peer lending through social lending sites such as Prosper and Lending Club com.
Peer to peer lending allows small investors to act as bankers, and invest in individual Americans who need to borrow funds for a variety of reasons, and are turning away from traditional lenders. The average person wanting a loan through Prosper needs between $1000 and $25,000 for a variety of reasons which are disclosed to the lenders.
Loans are issued for debt consolidation in over 50% of cases, and for business, home improvements, and autos. 21% of loans are issued for other reasons. Loans are open to bids and individuals can become lenders. They don’t take on a full loan themselves but bid in increments of $25 for the chance to lend to a chosen borrower. Lenders can see the credit score and histories of borrowers, read why the borrower needs the loan and read endorsements from the borrowers friends.
Lenders have the chance to make a difference and can choose borrowers who they feel will benefit from a loan, or people they consider worthy. Alternatively they can simply consider projected yield returns. The average estimated return on investment is 10.4% but there is no guarantee that the borrower will not default on the loan. Invested funds are not covered by FDIC insurance which individual savings accounts are.
The risk to lenders is reduced by spreading investment across loans, and the risk can be further reduced by choosing borrowers who are more highly rated as AA, A, B, C and down. The yields are higher with those rated lower as the APR’s are higher.
As an example a borrower who requests a loan of $2800 and is rated as an A borrower is charged an APR of 13.27%. The loan is for a 36 month period and the expected investor yield is 10.15%. In comparison a D rated borrower requiring a 36 month loan of $2500 is charged an APR of 29.27% and the investment yield is much higher at 24.75%. Lenders can ask borrowers questions directly, in addition to reading personal information and assessing their credit histories.
Peer to peer lending offers small investors a wonderful opportunity to obtain yields far in excess of savings accounts. Many see it as a chance to help others who have chosen to use peer to peer lending for their borrowing requirements rather than traditional lenders. If you want to increase the yield on your own savings then peer lending programs such as Prosper and Lending Club com are well worth considering as an investment opportunity.