The 6% Bank Yield
Investing with a banker is a terrible idea, but investing like a banker is a terrific idea.
Let me show you what I mean.
Investing with your banker means earning 10 basis points annually on a passbook savings account. If you're willing to tie up your money, your banker will pay 1.4% on a three-year certificate of deposit (CD) and 1.75% on a five-year CD.
Your banker then takes your investment, for which he pays you a pittance, and lends it to earn five, 10, and even 20 times his cost.
He earns a wealth-building rate of return, while you fail to earn a rate of return that even maintains purchasing power.
Today, though, you can invest like your banker - essentially cutting out the middle man - through a process known as peer-to-peer lending. In essence, you become the banker by lending directly to individuals and small businesses.
Investing like a banker is as easy as opening an on-line brokerage account. Lendingclub.com and Prosper.com, two preeminent peer-to-peer companies operating platforms in the United States, couldn't make it any easier.
These peer-to-peer companies do all the heavy lifting: borrowers are vetted and their credit rating is established, loan payments are collected and forwarded to investors, and late fees are assessed.
And should a loan fall into default, the peer-to-peer company initiates the collection process.
Best of all, you don't need much money to become a banker. You can create a diversified loan portfolio for as little as $2,500 (the minimum investment), because loans can be parceled in as little as $25 increments.
In addition, you're presented with a wide range of lending options.
Most peer-to-peer platforms allow you to create and diversify a portfolio by credit rating, by loan purpose (to start a business, to finance a car, to refinance credit card debt, etc.), and by time. And if you lack the confidence to create your own portfolio, peer-to-peer companies have ready-made diversified loan portfolios for you to invest in.
Investing like a banker does require a time commitment, usually three to five years. But the longer you commit, the more you earn. At Lendingclub.com, you can earn 2% to 6% more on a 60-month commitment of comparable quality loans compared to a 36-month commitment.
Like a banker, you make an upfront commitment of capital, and then each month you receive a check composed of high-rate interest and principal payments.
The borrowers amortize their loans with you just like they would with any banker. That means you receive a portion of your investment back each month instead of waiting for a lump sum of principal at the end of the lending period.
And if you discover that you really need to terminate your three-to-five-year commitment, you can sell your portfolio of loans on a secondary market just like your local banker can (though additional fees and market risk come in to play).
The return, though, is the real draw.
A portfolio of Lendingclub.com's highest rated 36-month loans - rated A1 - pay a 6.03% annual rate of interest. In comparison, a three-year CD pays 1.4% annually.
If you're prepared to accept more risk, you can earn more money on a higher rate of interest.
A portfolio of Lendingclub.com's B-rated loans are pay an average interest rate of 11.4%.
Then there's an even more speculative (and risky) class; you can invest in a speculative portfolio of loans that charge a 25.9% annual rate of interest. (Of course, your actual return will be lower due to a higher charge-off rate.)
A lot of people complain about the lack of income opportunities in today's market, but your local banker isn't one of them. That's easy to understand when you see the rate of return he captures.
The good news is there are opportunities for you to invest like a banker and capture similar returns too.
As a contributor to our premier dividend-investing newsletter - High Yield Wealth - I frequently hear from subscribers searching for extra income. Many of my subscribers complain about the lack of income opportunities in this low interest rate world.
If you're also searching for extra income, I encourage you to consider joining a peer-to-peer network. Making direct loans to consumers and businesses is just one unique way to earn some extra income by cutting out the middleman.
If you have any experience making peer-to-peer loans, I would love to hear about your experience. Please send me an email at firstname.lastname@example.org with all the details.