A Different Kind of Savings Account: Peer to Peer Lending

Have you ever heard of the term peer to peer lending? Chances are you already have, but you’re just not sure what it is exactly. Basically, it’s a type of system where investors are able to directly lend their money to borrowers without the interference of a traditional financial institution such as banks. The lending is overseen by an online regulated platform which essentially have lower costs than traditional banking, giving off the savings back to the investors and borrowers.

The most popular peer to peer lending company is the Lending Club. This may sound new and questionable at first, but in fact, this idea has been branded by Harvard Business Review as “The Breakthrough Idea of 2009″. As of February 28, 2010, the Lending Club has funded over $89,000,000 in loans and given $6,200,000 in interest earnings to its individual investors.

To make the investment safe, the Lending Club has a strict policy on loan approval. So far they have a less than 10% approval rate for loans, reducing the risk for their investors. What’s good about the club is that savers who want to maximize the earnings of their money can expect a return of investment at around 6-18%. Back in 2010, their average return was at 9.65% APY. This surely beats regular savings accounts and even some certificates of deposit.

Also, the interest rate can vary depending on how adventurous and risk seeking the investor is. The Lending Club has established different grade scales that investors can fall under. There are currently 7 categories, from Grade A to Grade G. Grade A being the safest investment, and Grade G being the riskiest. Those who play it safe can earn an average of 6.62%, while those in Grade G can earn as high as 20.85%. The middle of the scale is Grade D with an average interest rate of 15.26%. As of July 20, 2011, Grade A investors gained an average annual return of 6.04%, and Grade D investors have 12.11%.

These numbers are certainly for real and investing is made easy. The best thing about it is that investors can get a monthly cash flow that may be reinvested or withdrawn. Peer to peer lending is a fairly new concept that can provide investors with an arena for higher returns but yet with relatively safer investments. For those who are looking to gain more in cash, this might be something worth looking into.

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