Lending Club vs Bank Account with FDIC Insurance in 2021

Lending Club vs Bank Account with FDIC Insurance:

Reader Ben asked me if it would be a good idea to invest part of his savings in peer-to-peer (“P2P”) loans such as Lending Club or Prosper.

Lending Club and Prosper provide a platform where investors can make loans to a group of individual lenders that bypass the banks. Both are quite transparent with their loan performance data. This Lending Club chart shows that an experienced portfolio had an average return of 6.9%, with the 10th percentile at 5.4% and the 90th percentile at 8.6%.

As bank accounts and bonds don’t pay much these days, that return looks pretty good. When I asked Ben how much money he thought he was putting into P2P loans, he said $2,000.

I said no because there is a better way to get a higher return without risk and less work.

This sums up the transaction a lot:

1. You open the extra discounts and checks package20.

2. You make direct deposits totaling $1,500 or more each pay period into the checking account (ACH pushes credits from some banks or credit unions also count; see below).

3. You use the bill payment service to pay two bills, which can be scheduled as recurring.

4. The remaining funds can be withdrawn by ACH as there is no minimum balance requirement and no monthly fee if you have a $1,500 direct deposit.

5. The bank will credit you $20 to your savings account every month after the state closes.

6. That’s it. By investing Ben’s extra $2,000 in this way, he earns $240 a year. This is a 12% return that easily outperforms P2P loans with full FDIC insurance.

It also requires less work than P2P loans. Direct deposit, periodic account payments, and ACH withdrawal can all be pre-configured on autopilot. Once configured, it works by itself.

I have the extra20 pack since November 2013. It works exactly as advertised.

Here are some tips if you also want to get a better return than risk-free P2P loans:

1. After you apply online, you will receive an email with a link to your online application. Processing will be faster if you resend the identification documents you need: a copy of your driver’s license and a utility bill.

2. Wait to receive the email and notification that your application has been approved. You will receive a letter in the mail with your account numbers. You will receive another email asking you to use your Social Security number as your login ID when you register with online banking. You will receive a third letter with your temporary password. Only register with the internet bank after receiving the three letters.

The router number is 231372691. Use it to configure your ACH. You will also find it on one of the cards.

4. If you are not familiar with the Fiserv CheckFree account payment exchange rate used by many other banks, it may be a little bit intuitive to set up a recurring account. First, add an invoice under ‘Add a company or person to pay. Then go to Manage my accounts, select the invoice and then ‘Add an automatic payment’.

You can pay the same beneficiary twice on different days in the state cycle, or you can pay two different beneficiaries. Most bills (electricity, internet access, credit cards) are partially paid. You can schedule two fixed dollar payments from here and still pay the rest in the usual way at your current bank.

5. The government’s term begins on the date your accounts are opened.

6. If you want to use ACH push as a direct deposit, it will work with some banks or credit unions, but not with other banks or credit unions. Those that do not work code their outgoing ACH transfers as P2P payments, which Santander does not count as direct deposit.

Obviously, the 12% return on FDIC insurance is capped at $2,000. But if you’re not willing to take more risks with P2P loans, it makes sense to go to bank accounts.

P2P loans only make sense if you invest $20,000, or ideally $200,000, where an average return of 7% will make the difference, but then you have to ask yourself if you really want to take that much risk on P2P loans.

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