- Lower Minimum Investment - If you're like me, and you'd like to test out this newer form of banking before plunging head-first, you can do so at Lending Club with as little as $25 to start out with. However, the fewer notes you own, the greater the risk as each note makes up a larger portion of your portfolio.
- You Take on More Risk - Sure, you might be making more money, but Lending Club notes are not FDIC insured. If you invest all your money in notes for a particular loan (it is strongly encouraged to diversify your investment over many different loans), and the person who took out the loan skips town, you stand to lose your shirt (and possibly your house, wife, and kids).
- Your Money Is Illiquid - Again, investing in this way ties your money up for a set amount of time (usually three or five years).
I personally don't have any money invested in CDs. Even though my money would be very safe, the current dismal rates of return keep me from putting money there. I do have some money invested in Lending Club, and I plan to continue investing there in the new year.
No, I Meant, Which Investment Is for ME!?
Oh, sorry about that. Alternating between first, second, and third person gets confusing. :-)
Basically, it boils down to how risk averse you are. If you are willing to accept sub-optimal returns in exchange for the security that comes with FDIC insurance, go with certificates of deposit. However, if you're willing to accept a bit more risk for higher returns, perhaps it's time to expand your comfort zone into peer to peer lending.
For what it's worth, Lending Club just announced that it will not be taking fees out of loans greater than $20,000 for an unspecified amount of time, so now is potentially a good time to make the plunge.
Full Disclosure: I am an affiliate of Lending Club, and if you click and open an account through the ad at the top of the page, I will receive a commission.
*I say "essentially" because some are able to trade Lending Club notes on a secondary market, and you could cash out CDs prior to their maturity date, but doing so incurs a penalty. As such, for the purposes of this article, I'm only focusing on what I consider the primary reason to invest in either product.
**"Three years or five years" assumes that the note is not paid off early.
***Some people do lose money however; make sure to research both the notes that you are thinking of investing in as well as P2P loans more prior to investing.
This post was featured in the Carnival of Retirement.