Peer to Peer Lending Versus CDs

We’ve spent some time talking about finding ways to earn more money. Now, let’s look at some vehicles for saving and investing. For quite some time, I’ve been investing in CDs. The appeal for me has been that I blocked my own access to the money, so I wouldn’t be tempted to spend it. Hence the savings portion of this website – if I had money in my regular savings account, I would have spent every penny by now for sure.

CDs – The Draw for Me

I like to diversify. I’m using other investing vehicles aside from certificates of deposit, but CDs are definitely a staple for my portfolio. Many people talk bad about Certificate of Deposit Rates, claiming that they barely outweigh inflation, and that’s likely true. But when you invest smaller amounts like I did to use it as a foolproof savings account, frankly, it will be the single best way to keep your hands off the money. That in itself makes a CD worth its weight in gold (at least for me).

Peer to Peer Lending – Why it’s Better

Peer to peer (P2P) lending is great because you have the potential to earn a much higher rate of return for the money you invest. With the higher rate of return, however, you assume a much higher level of risk. This is not the case with CDs – you’re pretty much guaranteed you’ll get the money back, but the interest rate will be pitiful. Case-in-point: I earned the handsome sum of $6 from my $1000 18-month Certificate of Deposit Rates. For the current CD rates Click Here

On the other hand, P2P loans funded on websites like Prosper or Lending Club can earn you compounding interest rates as high as 19% or more, depending on how much risk you’re willing to assume. The higher the interest rate, the higher the chance that someone will default, which is which is vitally important to spread your loan funding amounts around as much as possible. For example, I never fund loans more than $25 each – even those that appear the most promising from the loan description and borrower stats. You never know when someone will default.

I also make sure to spread my risk around by choosing borrowers all over the spectrum of credit grades, but I lean more heavily toward A and B borrowers. These users are most likely to pay back their loans.

Please read a review of Lending Club, the premier portal for peer to peer lending.

My Decision

I’ve left my previously invested money in a CD… I like to pretend it’s not there so it will continue to earn interest and remain stationary in my portfolio. I’m letting it roll over year after year simply because it’s already there and I have the knowledge that it’s a diversified backup in case I may need it. However, P2P lending is a way my money can earn more interest, which is why I’m directing more of my extra income to funding loans on Lending Club these days. I keep the money in CDs because I’m a fan of diversification, of course – the more spread out your money is, the less risk you assume.

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