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Rewards Checking Accounts — Worth the Pain for A Lot Of Gain?

NorCalSavant — Thu, 26 Nov 2009 03:56:16 +0000

If you have cash sitting in your checking or savings account earning a measly one-half percent, you might be able to earn as much as 6% on a checking account. Unbelievable? It is true at the many so-called rewards checking accounts. These are typically offered by small community banks and credit unions trying to lure in profitable new customers with the potential to make even more money by cross selling other products later. Typically, the high interest rate only applies to balances up to about $25,000, although the limits can vary from bank to bank. For sums higher than the limit, the interest rates down to less than 1%. Another plus point of these programs is that many of these banks reimburse ATM surcharges at the end of the month when you withdraw money from other ATMs. So, cash is always conveniently available even if the bank doesn’t have many of its own ATMs spread around.

Sounds great, doesn’t it? But, remember — no pain, no gain. These accounts usually require qualifying transactions every month to earn high interest rates. Typically, you have to set up a minimum number of direct deposits, online bill payments, and ten to twelve debit card/check card transactions per month. You also have to agree to receiving electronic statements only. These requirements basically help banks cut costs and earn fees from card transactions, so they can still make money after paying higher interest rates on the balances. If you don’t meet the qualifications in any month, you don’t earn the high interest, but there is no additional penalty.

It so happens that these required debit/checking card transactions are a little too painful to manage for me. We typically charge everything on our credit card, and get 1% to 3% cash back. Many places charge fees for using debit/checking cards, which will in effect subtract from any interest earnings on the balance. And given our shopping lifestyle it will probably be hard for me to use the checking card 10 to 12 times every month.

However, if these transactions match your current needs and shopping patterns, it could help your money earn up to $1,500 in interest income over the year, while it is not locked out of reach in a CD for example. Of course, that is assuming the interest rates on these accounts continue to stay high through the year.

The Table below shows a number of rewards checking accounts with current interest rates, applicable maximum balances, and monthly transactional requirements. Many of these accounts limit customers to local state residents, but many have no geographical limitations.

Happy thanksgiving, everybody. Have a fun time with turkey or other delectable food, family, and friends. Hope you make good, carefully considered spending choices this black Friday, cyber Monday, and the holiday season. ETA: Thursday, the 26th is also the first anniversary of Islamist terrorist attacks on Mumbai. Hope you never forget the suffering brought on the innocent victims, and do what you can to strengthen security, law and order, bring justice to the culprits, and eliminate hatred of every hue wherever you are.

Rewards Checking Programs (Source: www.money-rates.com)

Institution	State	APY	APY Limit	Monthly Requirements
United Federal Credit Union Rates as of Nov. 25th	Arkansas, Michigan, Nevada, North Carolina, Ohio	6.01%	up to $25,000	Interest Plus Checking – electronic statements, 10 debit card transactions (Credit Transactions/Non-PIN based), 1 direct deposit or 1 ACH payment monthly. Credit Union members only.
Rio Bank Rates as of Nov. 25th	Texas	5.50%	up to $25,000	e-Checking Plus – 10 debit card transactions, 5 Online Bill Pay payments, 1 Direct Deposit per month, electronic statements
Goldwater Bank Rates as of Nov. 25th	Arizona	5.02%	up to $20,000	3 bill pay transactions, 1 direct deposit, 10 debit card transactions, e-statements, minimum balance of $1,000 to avoid service charge
Farmers Bank and Trust Rates as of Nov. 25th	Arkansas	5.01%	up to $25,000	True Rewards Checking – 10 check card transactions, 1 direct deposit or ACH auto debit, electronic statements, access online banking. Arkansas residents only. Must open account in person.
Southern Missouri Bank Rates as of Nov. 24th	Missouri	5.01%	up to $25,000	Kasasa Cash – Make at least 12 check card purchases and one monthly direct deposit or automatic payment, enroll in eStatements, Missouri and Arkansas residents only
Community Bank of Pickens County Rates as of Nov. 25th	Georgia	5.01%	up to $25,000	Relationship Rewards Checking – 10 check card purchases, electronic statements, 1 direct deposit or 1 automatic payment
Bank 1440 Rates as of Nov. 25th	Arizona	5.01%	up to $25,000	Optimum Checking – electronic statements, 1 direct deposit or automatic payment, 10 or more debit card transactions with Visa Debit Card (not ATM). Must finalize opening documents in person.
Bank2 Rates as of Nov. 25th	Oklahoma	5.01%	up to $25,000	Great Rate Checking – 10 check card purchases, 1 ACH or EFT direct deposit, e-Statements, access online banking
CharterBank Rates as of Nov. 25th	Georgia	5.01%	up to $25,000	10 check card purchases, 1 direct deposit or automatic payment, electronic statement
Kansas State Bank Rates as of Nov. 24th	Kansas	4.55%	up to $25,000	Free Rewards Checking – 10 check card transactions, electronic statements, 1 direct deposit or ACH auto debit, access online activity. New account documents must be signed in person.
Cross County Bank Rates as of Nov. 25th	Arkansas	4.51%	up to $30,000	10 debit card transactions, electronic statements, 1 direct deposit or one ACH auto debit. Arkansas residents only.
Bank of the Sierra Rates as of Nov. 25th	Open to all states	4.51%	up to $25,000	Sierra Reward Checking – 12 check card transactions, electronic statements, one bill pay online, one direct deposit or automatic payment. Must be opened online.
Focus Bank Rates as of Nov. 25th	Missouri and Arkansas	4.51%	up to $25,000	MAXimum Free Checking – 10 debit card transactions, electronic statements, access online banking. Limited to Arkansas and Missouri service areas.
First Clover Leaf Bank Rates as of Nov. 25th		4.50%	up to $25,000	My Great Rate Checking – 10 debit card transactions, electronic statements, 1 direct deposit or ACH auto debit, 3 online bill payments. Must come in person to open account.
The First National Bank of Wynne Rates as of Nov. 24th	Arkansas	4.33%	up to $25,000	10 VISA check card transactions, electronic statements, 1 direct deposit or ACH auto debit
Royal Banks of Missouri Rates as of Nov. 25th	Missouri	4.30%	up to $24,999	Majestic Checking – 10 Point of Sale Debit Card Transactions, 1 Direct Deposit and/or ACH Debit/Credit, E-Statement
Page Valley Bank Rates as of Nov. 25th	Virginia	4.25%	up to $25,000	10 VISA check card transactions, electronic statements, 1 direct deposit or direct debit. Geographic Restrictions – Contact bank for details.
First Community Bank Rates as of Nov. 25th	West Virginia, Virginia, North Carolina, Tennessee	4.25%	up to $25,000	Backbone High Yield Checking – 12 debit card point of sale transactions, electronic statements, 1 direct deposit
North Carolina Bank and Trust Rates as of Nov. 24th	North Carolina	4.25%	up to $25,000	Mad Money Checking Account – receive eStatements, 10 Visa Debit card transactions, 1 direct deposit or automatic draft
Greater Rome Bank Rates as of Nov. 25th	Georgia	4.15%	up to $25,000	10 debit card transactions, electronic statements, one direct deposit or ACH payment
Crossroads Bank Rates as of Nov. 25th	Illinois	4.10%	up to $30,000	Effingham First Checking – 20 VISA debit card transactions, electronic statements.Account must be opened in person in Effingham, IL.
Noble Bank and Trust Rates as of Nov. 24th	Alabama	4.05%	up to $25,000	Noble Horizons – 12 debit card transactions, electronic statements, at least one direct deposit or auto ACH debit
Progress Bank (FL) Rates as of Nov. 25th	Florida	4.04%	up to $25,000	12 point of sale debit transactions, e-statement and at least one direct deposit or ACH
Keystone Bank Rates as of Nov. 24th	Alabama	4.04%	up to $25,000	10 MasterCard Debit Card purchases, set up one Direct Deposit or Auto Debit from your account, enroll and receive your bank statements electronically
Coulee Bank Rates as of Nov. 25th	Wisconsin	4.04%	up to $25,000	10 debit card transactions, electronic statements, at least one direct deposit
Heartland Community Bank Rates as of Nov. 25th	Arkansas	4.02%	up to $30,000	Interest Plus Checking Account 10 check card transactions, electronic statements, at least one direct deposit or auto ACH debit, access online banking once
Ouachita Independent Bank Rates as of Nov. 25th	Louisiana	4.01%	up to $25,000	12 debit card transactions (not including ATM transactions), 1 recurring ACH debit or credit, electronic statements
Montgomery Bank Rates as of Nov. 24th	Missouri	4.01%	up to $25,000	Montgomery ebluechecking – 12 debit card purchase transactions, 1 direct deposit or ACH auto withdrawal, electronic statements
First Banking Center Rates as of Nov. 25th	Wisconsin	4.01%	up to $25,000	10 debit card transactions, electronic statements, at least one direct deposit
New Mexico Bank & Trust Rates as of Nov. 24th	New Mexico	4.01%	up to $20,000	Cash Rewards Checking – 12 signature-based debit card transactions, one automatic payment or direct deposit, electronic statements. Accepting accounts only from local service areas.
Rocky Mountain Bank Rates as of Nov. 25th	Montana	4.01%	up to $20,000	Cash Rewards Checking – 15 card purchases, direct deposit, electonic statements. Accounts from local service areas only.
Arizona Bank and Trust Rates as of Nov. 25th	Arizona	4.01%	up to $20,000	Cash Rewards Checking – 15 signature based purchases, eStatements, 1 direct deposit. Offer for local service areas only.
Bank of Blue Valley Rates as of Nov. 25th		4.01%	up to $25,000	Performance Checking – 12 signature-based debit card transactions, 1 direct deposit or ACH auto debit. Must open account in person.
Southeast National Bank Rates as of Nov. 24th	Illinois	4.01%	up to $25,000	Free Reward Checking – 10 debit card transactions, electronic statements, at least one direct deposit or ACH auto debit
The First National Bank of Dieterich Rates as of Nov. 24th	Illinois	4.01%	up to $25,000	Prime Rewards Checking – 10 debit card transactions, electronic statements, access online banking. Residents of local counties in Illinois only.
Opportunity Bank Rates as of Nov. 25th	Texas	4.01%	up to $25,000	10 debit card transactions, electronic statements, at least one direct deposit or ACH auto-debit, log-in at least once
Bank of Little Rock Rates as of Nov. 25th	Arkansas	4.01%	up to $25,000	Kasasa Cash – 10 debit card transactions, electronic statements, at least one direct deposit or ACH auto debit
Capital Bank Rates as of Nov. 25th	North Carolina	4.01%	up to $25,000	Smart Checking – 10 debit card transactions, electronic statements, at least one direct deposit or auto-debit
Lake City Bank Rates as of Nov. 24th	Indiana	4.01%	up to $25,000	8 POS debit card transactions, electronic statements, one direct deposit or ACH auto debit
Grand Bank Rates as of Nov. 25th	New Jersey	4.01%	up to $25,000	10 point of sale purchases, 1 direct deposit or ACH auto debit, electronic statements
First National Community Bank (FNCB) Rates as of Nov. 25th	Pennsylvania	4.01%	up to $25,000	ME – Maximum Earnings Account, 10 Visa check card purchases, electronic statements, 1 direct deposit or 1 automatic payment
AmericaNet Bank Rates as of Nov. 25th	Open to all states	4.00%	up to $10,000	Rewards Checking – 10 check card transactions, electronic statements
All America Bank Rates as of Nov. 25th	Oklahoma	4.00%	up to $25,000	Ultimate Rewards – Better Than Free Checking – 10 check card transactions, electronic statements
Southern Community Bank and Trust Rates as of Nov. 24th	North Carolina	4.00%	up to $25,000	ME Banking – 10 debit card transactions, electronic statements, at least direct deposit or automatic draft
Tioga State Bank Rates as of Nov. 24th	New York	4.00%	up to $25,000	Confirmed enrollment in TSB Online E Statements, 12 or more purchases with TSB debit card, one direct deposit or ACH debit per qualification cycle
ViewPoint Bank Rates as of Nov. 25th	Texas	4.00%	up to $50,000	Absolute Checking – 1 direct deposit or actively use free online bill pay, electronic statements, 15 purchases using Absolute Checking Visa Check Card
Peoples Bank Rates as of Nov. 25th	Tennessee	3.91%	up to $25,000	Interest Reward Checking – 10 debit card transactions, electronic statements, at least one direct deposit or ACH auto debit
MidwestOne Bank Rates as of Nov. 24th	Iowa	3.90%	up to $25,000	Power Checking – 10 debit card transactions, electronic statements, at least one direct deposit or auto ACH debit
Westbury Bank Rates as of Nov. 25th	Wisconsin	3.75%	up to $50,000	Ideal Checking – 10 debit card transactions, electronic statements, at least one direct deposit. Wisconsin residents only
Community First National Bank Rates as of Nov. 25th	Missouri, Arkansas	3.75%	up to $25,000	Free Reward Checking – 10 debit card transactions, electronic statements, at least one direct deposit or auto ACH debit
Community West Bank Rates as of Nov. 25th	California	3.75%	up to $25,000	Great Rate Checking – 10 debit card transactions, electronic statements, at least one direct deposit.
RCSBank Rates as of Nov. 25th	Missouri	3.56%	up to $25,000	e-Global Checking – 8 check card transactions, 1 direct deposit or auto ACH debit, electronic statements. Must open account in person.
Farmers State Bank Rates as of Nov. 25th	Minnesota	3.51%	up to $25,000	10 Shazam Check Card purchases (ATM withdrawals do not qualify), 1 automatic payment/transfer or direct deposit, access online banking, e-Statements
Liberty Bank Rates as of Nov. 24th	Illinois	3.51%	up to $25,000	eSmart Checking – 15 debit card purchases, 1 direct deposit or automatic withdrawal, 1 bill pay, electronic statements
Heritage Community Bank Rates as of Nov. 25th		3.51%	up to $25,000	10 debit card transactions, electronic statements, at least one direct deposit or auto ACH debit, access online banking
Bank of Ripley Rates as of Nov. 25th	Tennessee	3.51%	up to $25,000	Reward Checking – 10 Debit Card transactions, receive electronic statements, access Online Banking
1st National Bank Rates as of Nov. 25th	Wisconsin	3.51%	up to $25,000	10 check card transactions, electronic statements, at least one direct deposit or auto ACH payment monthly
First Robinson Savings Bank Rates as of Nov. 25th	Indiana, Illinois	3.51%	up to $25,000	Kasasa Cash – 10 debit card transactions, electronic statements, 1 online bill payment or 3rd party electronic payment. Account available in Illinois and Indiana market area.
Sutton Bank Rates as of Nov. 24th	Ohio	3.51%	up to $25,000	11 check card transactions, 1 direct deposit or ACH auto-debit, electronic statements
Bank of Idaho Rates as of Nov. 25th	Idaho	3.51%	up to $25,000	Kasasa Cash – 10 debit card transactions, electronic statements, 1 direct deposit or ACH auto debit, Idaho market area only
Citizens Bank Minnesota Rates as of Nov. 25th	Minnesota	3.51%	up to $25,000	10 check card transactions, receive electronic statements, at least one direct deposit or one automatic payment
Reliant Bank Rates as of Nov. 25th	Tennessee	3.51%	up to $50,000	Clearly Better Rewards Checking – 10 debit card transactions (excluding ATM withdrawals), 3 bill pay transactions, access online banking, 1 deposit or ACH debit, electronic statements
Bank of Fayetteville Rates as of Nov. 25th	Arkansas	3.50%	up to $50,000	Smart Checking – 10 VISA check card transactions, electronic statements, 1 direct deposit or ACH payment, sign on to online banking
M&F Bank Rates as of Nov. 24th	Mississippi, Tennessee, Alabama, Florida	3.50%	up to $25,000	Summit Checking – 12 debit card transactions, electronic statements, at least one direct deposit or auto ACH debit, log-in to online banking at least once
First Arkansas Bank & Trust Rates as of Nov. 25th	Arkansas	3.50%	up to $50,000	Kasasa Cash – 10 debit card transactions, electronic statements, 1 direct deposit, auto ACH debit, or online bill payment, 1 log-in to online banking. Arkansas residents only.
The Provident Bank Rates as of Nov. 24th	New Jersey	3.26%	up to $25,000	Free Smart Checking – 10 POS purchases, 1 direct deposit or 1 automatic ACH debit, electronic statements
Butler Bank Rates as of Nov. 25th	Massachusetts	3.25%	up to $40,000	Free Advantage Checking – 10 debit card purchases, 1 direct deposit or ACH debit, eStatements with online banking
Legence Bank Rates as of Nov. 24th	Indiana, Illinois	3.25%	up to $25,000	Kasasa Checking Account – 10 POS debit card transactions, electronic statements, one direct deposit / online bill payment or ACH auto debit, access online banking. Serving Southern Illinois and Evansville, Indiana Area.
Marlborough Co-Operative, A Division of Butler Bank Rates as of Nov. 24th	Massachusetts	3.25%	up to $40,000	Free Advantage Checking – monthly requirements: 10 debit card purchases, at least one direct deposit or ACH debit, receive eStatements with online banking
First East Side Savings Bank Rates as of Nov. 25th	Florida	3.01%	up to $25,000	Reward Checking – 10 debit card transactions, 1 direct deposit and electronic statements
Monroe Bank and Trust Rates as of Nov. 24th	Michigan	3.01%	up to $25,000	Performance Checking – 15 debit card transactions, electronic statements, receive e-mail reminders, at least one direct deposit of a payroll check or retirement check
Community Bank of Pleasant Hill Rates as of Nov. 25th	Missouri	3.01%	up to $25,000	10 POS debit card transactions, have at least one ACH direct deposit or ACH auto debit, receive electronic statements,
Haverhill Bank Rates as of Nov. 25th	Massachusetts	3.01%	up to $50,000	10 debit card transactions, electronic statements, at least one direct deposit or ACH auto debit. You must maintain an online account with a current e-mail address.
Premier Bank Rates as of Nov. 25th	Florida	3.01%	up to $50,000	Super Interest Checking – 12 check card transactions, electronic statements, one direct deposit or pre-authorized electronic payment
State National Bank of Texas Rates as of Nov. 24th	Texas	3.01%	up to $100,000	15 Visa Check Card purchases, 1 ACH direct deposit or debit, electronic statements, 1 online bill payment
Legacy Bank Rates as of Nov. 24th	Oklahoma	3.00%	up to $50,000	Win/Win Checking – 12 check card transactions, $100 opening deposit, electronic statements, sign up for direct deposit
Clinton Savings Bank Rates as of Nov. 25th	Massachusetts	2.76%	up to $49,999	Total Access Checking – 10 debit card transactions, electronic statements, at least one direct deposit or auto ACH debit. Market area Central Massachusetts.
Rollstone Bank and Trust Rates as of Nov. 25th	Massachusetts	2.75%	up to $100,000	All-In-One Checking – 10 debit card transactions, receive electronic statements, direct deposit either payroll, pension, or social security payments
Bank of Illinois Rates as of Nov. 25th	Illinois	2.75%	up to $25,000	VIP Elite Checking – 10 check card transactions, electronic statements, 1 direct deposit or recurring ACH
Southbridge Savings Bank Rates as of Nov. 24th	Massachusetts	2.75%	up to $50,000	Key Rewards checking – 10 debit card POS transactions, electronic statements, at least one direct deposit or ACH auto debit
BankNewport Rates as of Nov. 25th	Rhode Island	2.51%	up to $100,000	Go Checking – 12 debit card transactions, electronic statements, 1 direct deposit or auto ACH debit. For residents of Rhode Island and Southeastern Massachusetts only.
State Bank of Toledo Rates as of Nov. 24th	Ohio	2.51%	up to $70,000	Hometown Reward Checking – 10 debit card transactions, electronic statements, at least one direct deposit
NewPortFed Rates as of Nov. 24th	Rhode Island	2.50%	up to $50,000	eLoop Checking – 10 check card transactions, electronic statements, access online banking at least once, at least one for direct deposit or ACH
Home State Bank Rates as of Nov. 25th	Colorado	2.34%	up to $25,000	10 debit card transactions, electronic statements, at least one direct deposit
North Middlesex Savings Bank Rates as of Nov. 24th	Massachusetts	2.28%	up to $50,000	Max Checking – 12 debit card transactions, electronic statements, 1 direct deposit. Must live within market area to open an account.
Bank of Hiawassee Rates as of Nov. 25th	Open to all states	1.85%	up to $99,999	10 debit card transactions, electronic statements, at least one direct deposit, at least one online bill payment
Bank of Blairsville Rates as of Nov. 25th	Open to all states	1.85%	up to $99,999	10 debit card transactions, electronic statements, at least one direct deposit, at least one online bill payment
Bank of Blue Ridge Rates as of Nov. 25th	Open to all states	1.85%	up to $99,999	10 debit card transactions, electronic statements, at least one direct deposit, at least one online bill payment
Charter Bank Rates as of Nov. 25th	New Mexico	1.25%	up to $25,000	Turbo Checking – 10 check card transactions, electronic statements, at least one direct deposit, access online activity at least once

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High-Yield Online Savings Accounts and Certificates of Deposit

NorCalSavant — Wed, 12 Nov 2008 02:28:52 +0000

Once upon a time, Joe the plumber (yeah the same one, our much bandied recent alter ego) had to pay his respects at a big tall building with expensive furniture otherwise known as the neighborhood bank and smilingly accept small fractions for interest rate on his savings account because that was all that was available.

With the wide prevalence of Internet banking today, there is no need now to be tethered to the awful puny interest rates offered by the traditional brick and mortar banks.

You can open these savings accounts online, sight unseen from the comfort of your La-Z-Boy recliner and get three to four times higher interest rates than those from the traditional banks. These savings accounts are FDIC insured and are linked to your checking account at the traditional bank to allow easy online money transfer. They come with the standard limits of no more than six withdrawal transactions a month. You also have to plan for allowing at least four business days for the withdrawal from the savings account to show up in your checking account.

Best of all you can shop for the best rate online before opening the account. Some web sites I have found useful during my research are Bankrate.com, eMoneyCentral.com, Bank Deals Blog, and MoneyAisle.

All of these sites provide rate information from a number of banks depending on the location, initial deposit, term, etc. for a variety of financial services and products including savings accounts, checking accounts, money market accounts, and CDs, etc.

MoneyAisle works on a very interesting auction basis. You tell it the amount of your initial deposit for a savings account or initial deposit and term for a CD. A number of banks then compete to get your account by offering a better rate than the winner of the last round in a series of many rounds. This auction stops when there is just one bank left with the highest offer. All this takes only a few seconds. Only the winning bank’s name and information is displayed for you to follow up, which you have to do within a short time window. Of course, you don’t have to take the offer up. You can try again later, although the rates may change.

None of them guarantee the best possible return (in a worldwide or at least US wide sense), so you have to look through them all to find what appeals best to you. I have compared offerings from all the above. The table below summarizes the results of a search of best options for a $10,000 savings account and a $10,000 1-year CD. As the table shows, the rates are pretty close. The table reflects only the highest available yield. It does not consider other factors like customer service or bank rating. You can look through other listings at each site to decide where to put hard-earned money for the best possible return and customer service, and bank rating if you are investing an amount larger than the FDIC insurance limit.

Rate Comparison for a $10,000 Savings Account and a $10,000 1-Year CD on 11/11/08

	Savings Account Institution	SA APY	Certificate of Deposit	CD APY
Bankrate.com	UFBDirect.com, Irvine, CA	4.00%	GMAC Bank, Midvale, UT	4.36%
eMoneyCentral.com	EverBank	4.01%	GMAC Bank, Midvale, UT	4.36%
Bank Deals Blog	EverBank	4.01%	Delta Community CU	4.50%
MoneyAisle	First Trade Union Bank	3.70%	E-Loan	4.36%

If you are moving your money for better rates

If you are considering moving your money from a current account or rate chasing, here is a handy tool. Depending upon your current and new interest rates and the number of days lost in money transfer, it can tell you the “break even” days or the approximate number of days you must keep your money at the new rate to make up for the loss of interest during money transfer, and the additional earnings accrued after one and six months.

Rewards Checking Accounts — Worth the Pain for A Lot Of Gain? If you have cash sitting in your checking or savings account earning a measly one-half percent, you might be able...

Peer-to-Peer (P2P) Lending for Higher Returns

NorCalSavant — Sat, 01 Nov 2008 04:21:58 +0000

Got some cash sitting in the bank in your savings or checking accounts? Historically, you could have invested that extra cash in a CD at a bank for a little higher interest rate than that from the savings or checking account. But now there is another option where you can get even higher returns.

With the advent of modern technology and Internet, you can lend your money at a number of peer-to-peer lending sites to borrowers. These peer to peer lending sites bring lenders and borrowers together. As a lender, you choose the loan you want to fund at an interest rate accounting for the borrower’s credit worthiness, for example credit score, debt ratio, etc. The lending site services the loan, i.e. collects principal and interest every month from the borrower and deposits it into your account.

The lenders get a higher interest rate (compared to a bank deposit), and borrowers get a lower interest rate (compared to a credit card debt) making it a win-win for both the parties. The P2P lending sites make their money by charging fees to the lender and the borrower. A few of these P2P lending sites include Prosper, Lending Club, and Fynanz. Of these, Prosper is currently not accepting new lenders until they complete registration process with SEC for a public debt offering.

The interest rates on loans start typically at eight to ten percent for highly rated borrowers, and can go up to as much as twenty percent. This compares with interest rates of around three percent for a CD, and even lower rates for plain old savings accounts.

It is very important to understand a few things here — (1) that the interest return accumulates differently, (2) there are different liquidity implications, and (3) there are risks associated with P2P lending.

Interest Rate Comparison

The interest rate on a CD cannot be compared directly to that on a loan lent through a P2P lending site – something that the lending sites conveniently ignore when comparing the interest rate on a P2P loan with that from a bank account. Typically, on a CD the entire principal keeps earning interest to the end of period and the interest truly compounds. On a P2P site loan, a part of the principal is returned with every installment payment. Consequently, the interest earned every month keeps going down as time advances. Of course, the principal portion of the payment correspondingly goes up to keep the monthly installment the same.

For example, consider putting $1000 into a CD for three years at 5%, and lending $1000 at a P2P site at an interest rate of 5% after accounting for service fees with payments spread over three years. At the end of three years the CD investment would be worth $1,161.82 assuming daily compounding. However, the monthly payment from the loan would be $29.97, resulting in a total return of $1,078.95 from the loan in three years. Effectively, the interest gain from the CD was $161.82, while that from the loan was only $78.95. If the CD interest rate were 2.5%, the CD would be worth $1,077.88 at the end of the three years, which is almost the same as $1078.95, the total return from the loan at 5% interest rate.

In other words, the comparable interest rate on the P2P loan could be considered just about half of the stated 5% rate. However, this was just an example to clarify the real return comparison between a CD investment and P2P lending. In real life the interest rates on a CD and a P2P loan are not the same. A 15% P2P loan might be comparable to a CD when the CD interest rate jumps up to 7.5%. If that happens, most likely the P2P loan rates will go up too.

A strategy to maximize the return from a P2P loan is to diligently transfer the loan installments to a savings account to earn additional interest and effectively raise the total returns from the loan.

Liquidity

Another major difference between a savings account, CD investment and a P2P loan is in the liquidity of the funds. A savings account is completely liquid meaning you could withdraw your money as and when needed, unless the bank folded – more on the risk later. A CD investment is not available for the duration of the CD, unless you are willing to pay a penalty. The outstanding installment payments from a P2P loan are not available before the time. Paying an early withdrawal penalty is not an option.

Lending Club has just made it possible for a lender to offer their Notes (issued by Lending Club to correspond to specific borrower loans) for sale prior to maturity on its trading platform, allowing the lender a measure of liquidity. Prosper also seems to be working to start a resale facility at a future date.

Another option in case you need the money prior to maturity is to borrow the same amount of money from other lenders at the P2P site. Your incoming payments from the lent loan could be used towards the outgoing payments for the borrowed loan. If you have good credit standing, which you probably should because you are able to lend, you would probably pay a lower interest rate on your borrowed loan than you would get on your lent loan. It probably gives you an idea for arbitrage – borrow low, lend high, use no personal capital. But arbitrage is only when there is no risk. Here, there is a clear risk of default by other parties.

Risk

That brings me to the most important consideration of risk. A savings account or a CD is federally insured to $100,000 ($250,000 for now) or other appropriate amounts. There is no risk of losing any part of it. Lending on a P2P site carries no such insurance. If the borrower defaults, a collection agency may or may not be able to get some of your money back. The borrower pays a price in terms of his or her future credit, but you could be out of your money.

You could better manage your risk by choosing borrowers matching your risk criteria and by spreading your capital to many loans. There is no free lunch as they say – higher the return, higher the risk.

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