The name of the game in investing is to maximize your return while taking as little risk as possible. To find the best low risk investments with high yield, sometimes we have to look outside of the box.
While it’s true that amount of return you can get depends on how much risk (and losses) you are willing to accept, great investors make their living by balancing these forces. While we can’t decide for you how much risk you are willing to take, we have structured this guide to give you a range of options based on zero, low or medium risk.
Some of these options like picking up a bonus for switching banks, or getting into a higher yield savings account carry zero risk. Other options could take some additional learning or planning on your part.
The Top 16 Best Low Risk Investments With The Highest Returns:
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My Favorite Low Risk Investment Right Now Perfect blend of risk and reward for me. |
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Zero Risk Investments Seriously, this is free money. |
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Low Risk Investments Still secure, minimal downside. |
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Medium Risk Investments Losses can occur from time to time. |
My Favorite Low-Risk Investment Right Now
LendingClub – Peer-to-peer Lending
Peer-to-peer lending, or P2P Lending, is one of our highly recommended short term investments. Instead of buying shares in a company you are lending your money to individuals or businesses, with the idea being they will pay you back with interest.
Let’s say someone needs to borrow $10k to consolidate their debt. They create an account with Lending Club and apply for a loan.
Me as an investor also creates an account with Lending Club and buys this debt. The borrower makes monthly payments (the principal and interest) to me in my Lending Club investment account.
There are several companies that underwrite P2P lending, some like Lending Club and Prosper facilitate personal loans, while others, like Worthy, facilitate business loans (the process is the exact same).
What is even better is that you can invest as little as $25 in a loan to get started. Depending on your appetite for risk and how much capital you have to invest, you could score some decent returns without the stress that comes with high-risk investments. Learn more about how I did with P2P lending in my review of LendingClub.
I had one friend make a 5,000 dollar investment in Lending Club and buy into 200 different loans. Now that is diversification! Learn more about my best ways to invest $5,000.
Investments that require zero risk-taking
Ok, maybe these aren’t actual investments, but consider them smart money moves to make more money and optimize your finances at a baseline.
Grab a Bank Bonus
If you have some extra money you won’t need for a while, you can occasionally earn some free cash with a bank bonus from one of the nation’s best banks. Most banks will offer a bonus as an incentive for you to sign up, and these bonuses can be worth several hundred dollars on their own.
Bank bonuses are sometimes regional, however, and can depend on the local banks in your area and the products they offer.
In exchange for your bank bonus, you may have to set up direct deposit to your new account or use a bank-issued debit card for a certain number of transactions within the first few months.
Just remember to read through all the fine print to learn about any fees that might be levied and how you can avoid them.
By jumping through these hoops, you can usually earn a few hundred dollars for your efforts. Best of all, you won’t have to worry about losing a single cent of your deposit. And if you decide not to keep the account for the long haul, you can always close it once you earn the bonus and meet all of the bank’s requirements.
Trade Up To A High Interest Savings Account
If you’re looking for a risk-free way to earn some interest on your money, a high yield savings account might be your answer. With these accounts, you’ll earn a nominal amount of interest just for keeping your money on deposit.
Other than opening your account and depositing your money, this strategy requires almost no effort on your part, either. The best high yield savings accounts offer competitive interest rates without charging any fees.
Our top savings account picks:
Open An Online Checking Account
Just like high yield savings accounts, online checking accounts let you earn small amounts of interest on the money you deposit. If you’re going to park your money in the bank anyway, you could surely appreciate earning some interest along the way. Best of all, many online checking accounts charge zero or minimal fees to get started.
When looking for an online checking account that actually lets you earn interest, look for a bank with excellent customer service, a user-friendly online interface, and competitive interest rates.
If you want the utmost flexibility, it’s also important to seek out an account that doesn’t impose account minimums or deposit requirements. And if you want to withdraw money frequently, you’ll want to make sure you have access to local, no-fee ATMs as well.
Earn More Credit Card Rewards
Credit cards are not the devil. We all spend money, and when used properly, a credit card can help you earn cash back on your spending. By picking up a cash back credit card, you earn “points” that translate into real money.
And in reality, the “rewards” you earn with some of the top cards are far more lucrative than anything you might earn with a Certificate of Deposit or online savings account.
With credit cards I currently earn:
- 5% back on cable, internet, cell service and at Amazon and Target
- 3% back on dining and travel
- 6% back at the grocery store
- 2% back on gas
Here’s how these offers work:
Let’s say you picked up a Chase Sapphire Preferred® card and put your regular spending on it to earn the signup bonus. Once you spent $4,000 on your card in 90 days, you would earn 60,000 points worth $750 in travel ($600 in gift cards or cash back). If you spent that $4,000 on bills you would normally pay like groceries, daycare, or utilities, and paid your card off right away, this is the closest thing to “free money” you’ll ever find!
If you want to learn more about the easy money you can score with credit card rewards, check out our guide on the best cash back credit cards.
Best Low Risk Investment Options
These investment options carry a very small amount of risk overall. In turn, you won’t expect to make as much, but you money should be relatively safe and still earning yield.
Certificate of Deposit
No matter how hard you look, you won’t find an investment more boring than a Certificate of Deposit. With a Certificate of Deposit (CD), you deposit your money for a specific length of time in exchange for a guaranteed return no matter what happens to the interest rates during that time period.
Be sure and buy your CD with an FDIC insured financial institution (up to $250k is insured). The longer the duration of the CD, the more interest the financial institution will pay.
For a quick low-risk turnaround, I recommend a CIT Bank 11 mo No-Penalty CD at 1.10%.
Money Market Account
A money market account is a mutual fund created for people who don’t want to lose any of the principal of their investment. The fund also tries to pay out a little bit of interest as well to make parking your cash with the fund worthwhile. The fund’s goal is to maintain a Net Asset Value (NAV) of $1 per share.
These funds aren’t foolproof, but they do come with a strong pedigree in protecting the underlying value of your cash.
It is possible for the NAV to drop below $1, but it is rare. You can park cash in a money market fund using a great broker like TD Ameritrade, Ally Invest, and E*TRADE or with the same banks that offer high interest savings accounts.
While you may not earn a lot of interest on your investment, you won’t have to worry about losing vast amounts of your principal or the day-to-day fluctuations in the market.
Treasury Inflation Protected Securities (TIPS)
The US Treasury has several types of bond investments for you to choose from.
One of the lowest risk is called Treasury Inflation Protection Securities, or TIPS. These bonds come with two methods of growth. The first is a fixed interest rate that doesn’t change for the length of the bond. The second is built-in inflation protection that is guaranteed by the government.
Whatever rate inflation grows during the time you hold the TIPS, your investment’s value will rise with that inflation rate.
For example, you might invest in TIPS today that only comes with a 0.35% interest rate. That’s less than a certificate of deposit’s rates and even basic online savings accounts.
That isn’t very enticing until you realize that, if inflation grows a 2% per year for the length of the bond, then your investment value will grow with that inflation and give you a much higher return on your investment.
TIPS can be purchased individually or you can invest in a mutual fund that, in turn, invests in a basket of TIPS. The latter option makes managing your investments easier while the former gives you the ability to pick and choose with specific TIPS you want.
Want to protect your portfolio from inflation? Purchase TIPS through a great broker like:
US Savings Bonds
US Savings Bonds are similar to Treasury Inflation Protected Securities because they are also backed by the United States Federal government. The likelihood of default on this debt is microscopic which makes them a very stable investment.
There are two main types of US Savings Bonds: Series I and Series EE.
Series I bonds consist of two components: a fixed interest rate return and an adjustable inflation-linked return. They are somewhat similar to TIPS because they have the inflation adjustment as part of the total return.
The fixed rate never changes, but the inflation return rate is adjusted every 6 months and can also be negative (which would bring your total return down, not up). Series EE bonds just have a fixed rate of interest that is added to the bond automatically at the end of each month (so you don’t have to worry about reinvesting for compounding purposes).
Rates are very low right now, but there is an interesting facet to EE bonds: the Treasury guarantees the bond will double in value if held to maturity (which is 20 years).
That equates to approximately a 3.5% return on your investment. If you don’t hold to maturity you will only get the stated interest rate of the bond minus any early withdrawal fees.
Another bonus to look into: if you use EE bonds to pay for education, you might be able to exclude some or all of the interest earned from your taxes.
Looking to purchase some Series I or Series EE Bonds? You can do that directly through TreasuryDirect.gov.
Annuities
Annuities are a point of contention for some investors because shady financial advisors have over-promoted them to individuals where the annuity wasn’t the right product for their financial goals. They don’t have to be scary things; annuities can be a good option for certain investors who need help stabilizing their portfolio over a long period of time.
If you’re in the market for an annuity, however, be aware of the risks and talk with a good financial advisor first.
Annuities are complex financial instruments with lots of catches built into the contract. Before you sign on the dotted line, it’s important to understand your annuity inside and out.
There are several types of annuities, but at the end of the day, purchasing an annuity is on par with making a trade with an insurance company. They’re taking a lump sum of cash from you.
In return, they are giving you a stated rate of guaranteed return. Sometimes that return is fixed (with a fixed annuity), sometimes that return is variable (with a variable annuity), and sometimes your return is dictated in part by how the stock market does and gives you downside protection (with an equity indexed annuity).
If you are getting a form of guaranteed return, your risk is a lot lower. Unlike the backing of the Federal government, your annuity is backed by the insurance company that holds it (and perhaps another company that further insurers the annuity company). Nonetheless, your money is typically going to be very safe in these complicated products.
Cash Value Life Insurance
Another controversial investment is cash value life insurance. This life insurance product not only pays out a death benefit to your beneficiaries when you die (like a term life insurance policy) but also allows you to accrue value with an investment portion in your payments.
Whole life insurance and universal life insurance are both types of cash value life insurance. While term life insurance is by far a cheaper option, it only covers your death.
One of the best perks of using cash value life insurance is the accrued value can not only be borrowed against throughout your life but isn’t hit with income tax.
While cash value life insurance isn’t for everyone, it is a clever way to pass some value onto your heirs without either side being hit with income tax.
See our best life insurance companies post.
Medium Risk Investment Options
All of these options carry more of an average risk profile, and are variations of traditional stock/bond investing. You may want to consult a financial advisor when looking at these options.
Crowdfunded Real Estate Investing
If you like the idea of investing in real estate but shudder at the thought of being a landlord or home prices where you live are too expensive, real estate crowdfunding could be the solution!
Real estate crowdfunding got popular after Congress passed the 2012 Jobs Act, which essentially allowed real estate investors and developers to raise money from the public to fund their projects.
Let’s say a developer has plans to build a 200 unit condominium in Las Vegas. In the past, he could only raise funds for this project from private investors in his network. These days, however, he can list his project on a real estate crowdfunding platform and anyone in the public can invest!
Fundrise operates like Lending Club, except all of the investments are geared towards real estate. They keep risks low and interest high by carefully vetting the projects they invest in.
Dividend Paying Stocks and ETFs
One of the easiest ways to squeeze a bit more return out of your stock investments is simply to target stocks or mutual funds that have nice dividend payouts.
If two stocks perform exactly the same over a given period of time, but one has no dividend and the other pays out 3% per year in dividends, then the latter stock would be a better choice.
With dividend stock mutual funds, the fund company targets stocks that pay nice dividends and does all of the work for you.
Corporate Bonds
Unlike U.S. Treasury bonds, corporate bonds are not backed by the government. Instead, a corporate bond is a debt security between a corporation and investors, backed by the corporation’s ability to repay the funds with future profits or using its assets as collateral.
Since you are taking on risk by investing in a company, the returns on corporate bonds are higher than other types of bonds, no matter how creditable the company’s reputation is. While that’s reassuring enough for some investors, if you’re looking for truly low-risk corporate investing, you should consider bond funds.
Bond funds come in the form of ETFs or mutual funds and help to diversify your investment across a number of bonds.
Robo advisors provide a great opportunity for investing in bond funds. If you’re looking to choose what types of funds to build into your portfolio but don’t want to deal with the hassle of constantly balancing your account and re-allocating funds, these might be best for you.
- No minimum balance
- Automated IRA rollovers
- Cutting-edge technology platform guided by financial experts
- One low annual management fee
- Offers Taxable, IRAs, Roth IRAs and SEP accounts
- Access to financial advisors
- Individual and joint investment accounts
- SIPC protected up to $500,000
Municipal Bonds
When a government at the state or local level needs to borrow money, they don’t use a credit card. Instead, the government entity issues a municipal bond. These bonds, also known as munis, are exempt from Federal income tax, making them a smart investment for people who are trying to minimize their exposure to taxes.
Most states and local municipalities also exempt income tax on these bonds but talk to your accountant to make sure they are exempt in your specific state.
What makes municipal bonds so safe? Not only do you avoid income tax (which means a higher return compared to an equally risky investment that is taxed), but the likelihood of the borrower defaulting is very low. There have been some enormous municipality bankruptcies in recent years, but this is very rare. Governments can always raise taxes or issue new debt to pay off old debt, which makes holding a municipal bond a pretty safe bet.
You can buy individual bonds or, better yet, invest in a municipal bond mutual fund at brokers like:
Preferred Stock
Adding on to the dividend stock theme is preferred stock. Preferred stock is a type of stock that companies issue that has both an equity (stock) portion and a debt portion (bond). In the hierarchy of payouts to forms of investments, preferred stock sits between bond payments (which come first) and common stock dividends (which come last).
Preferred stock are not traded nearly as heavily as common stock, but do have less risk than the common stock. It is just another way to own shares in a company while getting dividend payments.
You can track down preferred stock investments at:
The Bottom Line
As you get closer to retirement, it’s important to reduce your risk as much as possible. You don’t want to start losing capital this late in the game; since you have many years of retirement ahead of you, you want to preserve your cash.
The best low risk investments can help you do just that. By letting you earn nominal amounts of interest on your money with little risk, you can help your nest egg keep up with inflation without losing your shirt. Just remember to read the fine print and educate yourself along the way. And if you’re ever in doubt over an investment product or service, speak with a qualified financial advisor and ask as many questions as you can.
Check out some of our great reviews to help you get a better grasp on what will meet your investment needs:
Your review of LendingClub is far too positive. As the saying goes, “Past performance is not a guarantee of future results”. In a year or two I would suggest re-reviewing LC with your actual returns.
But here are the gaps that I see in your article.
One, notes you purchase are not easily sold for face value in the secondary market. If you want to sell a note you’re no longer interested in owning, you will have to sell it at a significant discount on the secondary market.
Two, some borrowers will straight roll you, meaning never even make a single payment. The worse part of this is that because your investment was less than 12 months, you can’t even deduct it as a capital loss, if you are investing in a taxable account. For IRAs, you’re just straight out of luck. And this doesn’t even discuss the fact that charged off notes will get sold off by LC and you’ll get pennies on the dollar (net of LC’s cut for the “recovery”)
Three, there are statistics pages on LC’s website that show the range of returns, and at present the vast majority of LC note investors are not getting anywhere near 10% return.
Four, if you decide to start an IRA account with LC, there is an administrative fee if your balance is too low. When it comes time for you to start taking minimum required distributions from your IRA, then you had better hope you are not forced to sell notes to avoid IRS mandated penalties (see point number one above).
Five, LC has been engaging with other financial institutions to buy up whole notes, never getting to the fractional market (retail lenders such as yourself) that got them started.
Six, this may have changed, but at least in past, if LC ever goes bankrupt your investment with the notes goes to nothing. You are actually not investing directly in the notes, you are investing with LC who then lends the money to the borrower based upon what notes you want to put money towards. So, make sure you know if LC is a going concern long enough for you to get your money back. And note that LC recently did a reverse stock split.
Seven, if you invest in a taxable account, net of taxes your returns will likely not be much better than U.S. Treasuries.
Eight, there are many long-time investors, on other forums, who are unwinding their LC investments. These are sophisticated people who’re using LC’s API to pull data down, score notes and make investments every four hours that LC makes notes available for sale.
Which brings up number Nine. If you’re investing notes, with the sophisticated operations that some investors have, you will be lucky to invest in the crumbs of notes that fall through the cracks.
And Ten, The previous two years and the current year-to-date, my charge-offs have exceeded my interest income. At first I had a real nice rate of return, and up until 2017 I was stable around 7%, thinking I had found a way to get good income, then 2017 happened, and 2018 and 2019 haven’t been better. Over the years of investing on LC, I’m looking at a net of taxes return of about 2% overall and that isn’t climbing when charge offs exceed interest income.
And just to go to Eleven, you might score a good note with high credit scores and high interest rates, but then another financial institution will come along and offer that same borrower another re-financing package with better terms and that borrower will pay your note back in full. So, don’t count your chickens until all your eggs are hatched.
And don’t even get me started on how much in fees LC takes from the loan payment as it relates to collections.
Does Lending Club lend money to persons from other countries or only within United States
The authors comments are unrealistically skewed towards the positive. In reality, after 3.5 years, my initial investment of $5K has only made a 3.2% return with 18% of the loans written off. Oddly enough, the highest percentage of loan write offs have been A and B rated loans with my loan portfolio containing A, B, C and a few D rated loans. In my opinion, Lending Club is not aggressive enough in pursuing payment and they charge you for the lame collection attempt they make. I am currently make a higher return in certificates of deposit and I recommend that course of investment over an unpredictable return and poorly administered collections procedures. Another sad fact of the Lending Club is that they promote the ability of selling loans out of your portfolio which in practice does not work.
Very interesting article – thank you for your effort. A couple of questions which you might have covered in your article. When is interested credited to your account and can the interest be withdrawn say on a monthly basis leaving the principal in the account for further investment when after current loans mature. I would like to receive to receive the interest as part of my monthly income.
Thank you for your help.
Great article. Informative and easy to follow. Will definitely be checking out this form of investing further. Thanks!
Quistion: If you invest 1000 with a posible return on 3% what is 30 anual, but you divide all this 1000 in miltiples notes. With one single person that don’t pay you, you lose the whole posible return. Is that true or i am missing something???
Please explain
Hi Angel – Each note is $25. So if that loan defaults, you will lose part of your investment return. But if you’re earning 10%, that would be $100. A single loan default would drop your net return to 7.5%.
Jeff, good morning. Your article is dates 10/19/2018 but in your personal experience you only reference 2014 and 2015 data for the Lending Club. Did you start investing prior to those dates or only in the last 2 years? Do you plan to significantly increase the amount invested by influx of new funds or allow to grow through reinvestment of funds currently invested? What percentage of your total investment portfolio do you have invested in the Lending Club?
I’m curious about this.. I’m on retirement so I would need to invest only $25 per check.. I only get paid once a month.. what would you recommend (Bill Naquin)
Hi William – Once you’ve satisfied the minimum investment, you can set up a direct transfer of the $25 per month. I’m not aware of any minimum ongoing contribution.
In your article, you stated “…we put together an in-depth Prosper vs. Lending Club comparison.” However, I was unable to find a link to this comparison. Do you mind providing that link? I would be very interested in seeing the comparisons, and which you would recommend over the other. Thank you very much for your time.
Hi Rob – There is no link because we prepared the comparison.
I appreciate the information. However, since most people do not make 70k do you have any suggestions for investment the other 80% of people?
Hi John – If you make well below $70k, you might want to look at some safer investments, like bank CDs or online savings accounts – unless you have a large amount of money to invest.
I invested in a Lending Club IRA. It’s been a few years, and the return on the investment never topped 5%, so I’m currently trying to roll the money over into another retirement account. Lending Club, and Strata Trust, the company that manages the IRA, make this difficult and time consuming. It’s taken 5 phone calls and several emails. The transfer process will take at least three days. I’m only transferring about 25% of my money, because the rest will be tied up until the loans mature. So, I’ll have to go through this multiple times. From my perspective, Lending Club is a waste of time and money.
Thank you for the review. It sounds very interesting. Will you offer a bit more information on a paragraph that sounds scary: “When a payment is past due, you as an investor will pay a collection fee of 18% if the loan is at least 16 days past due but no litigation is involved. If litigation is required, you will be required to pay 30% of an attorney’s hourly fees, plus attorney costs”?
18% of what? 30% of what – total lawyer fees? That could sink a person.
Thank you!
Vanessa E.
Hi Vanessa – It’s 18% or 30% of the note experiencing the delinquency or non-payment. So if your investment is $25 in that note, it will be 18% or 30% of that amount. So you’re liability is limited.
Question: You said an investor will pay an 18% collection fee for late payments and 30% of attorneys’ fees in the event of litigation. Is that 18% and 30% of my investment in the note (e.g. $25 investment)? If it is not proportionate, those charges could be really high, especially litigation costs. It could wipe out my entire account.
Hi Susan – I believe the percentages are based on the amount of the note still outstanding.
I want to know if a nigerian is entitled to this loan
Hi Abelebara – It may be available if you’re a US resident with a taxpayer ID number. But I don’t believe it’s available if you live in Nigeria. Please do a web search and see if Lending Club has a Nigerian branch, or if there are any other P2P lenders there.
Question:
Should I get a loan through Lending Club, is there a penalty for paying the loan off early??
Hi Lucie – That’s a decision you’ll have to make for yourself. You might try applying and see what they come back with. And no, there is no prepayment penalty.
As a non resident,living in the Caribbean to be exact St. Maarten can i open an account and start investing as well?
thanks
I don’t think so Zen. To my knowledge it’s only available in the US. But you can contact Lending Club and ask if you can, or what they might suggest.
As an investor – large amount of defaulted loans ans write downs. There is no path to get out of Lending club notes except to sell them on secondary market – takes a long time unless you are willing to discount them – once you start your notes the yield be comes negative “(Adjusted Net Annualized Return -4.46%)” quickly. In hind sight – probably was not worth it
Since this article is more than a year old, do you have any updates to it?
I do not recommend Lending Club at all. I have been an investor with them for a very long time. And yes I did make money with them when I was actually reinvesting my money.
However, a better opportunity came my way and I wanted to take my lending Club money out to use it. I knew this would take time to do which I was ok with.
Since I was no longer reinvesting my money on new loans my rate of returns just keep falling and falling and falling. The reason for this is new loans is where you are making your returns. Over time way to make loans go default.
I do not like this system and would never invest with them again.
Hi Justin – It’s true, you do have to reinvest to make P2P lending work efficiently. But have you calculated the actual return on the declining balances? It may have been positive, but as the balance drops, it seems like you aren’t making any money, even though you may be.
There’s other direct lending programs out there. From my experience with L.C. where borrowers can default and just walk away – and leave you hanging as a lender with no recourse. There are programs that loan for ie fund commercial & residential real estate with the loan – a tangible asset for the lending company to have a lien against.
The risk reward isn’t worth it on the L.C. program.
Hi Todd – Yes, PeerStreet is an example. They make only secured real estate loans. But the returns aren’t as high as Lending Club, and even they admit to less than 100% recovery on defaulted loans, especially in states with judicial foreclosure laws. No platform is 100% perfect, but that doesn’t mean they aren’t worth investing in.
Great Program but there a few issues for having a lending account:
1. Default rate is way too high
2. No clear exit strategy except try to sell notes on secondary market or at a discount if you need money sooner.
3. Try to transfer money back to your IRA from L.C. – took 2+ months
they were less than helpful and refused to help or give any info to company receiving funds- they just rejected with no reason.
I’ve been selling notes since last June and still am not out completely
Hi Jeff,
Great article but I do beg to differ on just a few of the borrowers criteria you have listed. I just paid in full my lending club loan as of today and it was a last resort for us and ended up saving us the past few months from bankruptcy or credit counseling. It basically saved our credit scores and saved us over $200 a month by consolidating. We were turned down by everyone for months because our debt to income was almost 90% and our scores were 600 and 675. Combined we only make $108K and our debt was pushing $35k which by today’s average I know is not that high but for us it was drowning. Anyway in our situation I took a one last shot before we called credit counseling and lending club actually approved us. We originally got approved for $25k plus their $1,500 fee, which took the bulk away and still saved us a ton even at the 28% interest rate they approved us for. We made 3 payments on it and between that and our tax return we got our utilization down to 5%, our scores jumped hugely and we were able to refinance the loan through our credit union at a 7% interest rate saving us even more money. I thank lending club for being the ones who saved us from ruining any chance of bouncing back from this and making it possible. It’s tough to do but sometimes places take a chance and it pays off.
Thanks for sharing a success story Nicolle!
Thanks for the article! This is great information, and I am certainly interested in investing when I am able to save up a bit more money. My question is, what is the fee for withdrawing money once you have started to earn, if you’d rather withdraw a specific amount than to reinvest?
Hi Kelly – There shouldn’t be a fee for withdrawing money, but there might be for closing out the account.
After watching your video and just reading the beginning of this blog, I went to lendingclub and open an account. However, upon reading the rest of your blog, I would like to request to have my account be credit to you. Would that be possible?
Also, thank you very much for this! I think it’s wonderful how you complete the blog as you go through the site.
Hi Kammie – Thank you so much. You can see if they have a referral program then give them my name. That might work.
how are investors profits income taxwise
Hi Ed – They’re taxed the way any investment income is. The interest is taxable.
I honestly don’t believe lending clubs loan standards are very thorough or up to what banks require. For example I invested in 134 loans and 18 are in default, late or charged off. That is a 13% default rate. Quite a few of the defaults paid 1 or 2 payments and stopped paying. I am slowly withdrawing my cash monthly to recoup cash as it comes back but once my balance says 0 I will leave the website. I would not invest a single dollar. You would be better off investing in some dividend stocks or ETF. Ally Bank pays 1.0% interest. All better than lending club.
I put $10,000 in to Lending Club and had it set up to reinvest accrued interest. I have had the money in for close to 9 months. I have made $450 so far, 4 loans have been charged off, 2 defaults, and currently 9 that are 36-120 days late. I stopped the auto reinvestment and will be pulling my money out as it is paid. I am very disappointed in this investment. They need to come up with a better way to collect when borrowers default on loans. Most of the deadbeats only paid 2-3 payments and then quit. I could have placed the $10,000 in stocks and made at least $1,000 on my money by now. If you have money don’t waste your time on this, go with the market instead.
You do realize your comparing Lending Club against one of the most bullish markets in history, right?
Thank you for your review of Lending Club. You mention that you have to reinvest your earnings. Why do you have to reinvest? Can you get money out of the account as it is accrued? Or do you have to wait until the end of the note, which means the cash will be sitting there for years?
Thanks.
Hi Stephen – All loan notes held with LC are self-amortizing. That means that payments you receive are both interest and principal. At the end of three or five years, the money will have been completely withdrawn if you took it as income and spent it. That’s why you have to reinvest, to keep your investment growing by investing loan payments into new loans.
I applied for a loan on 9/13/17. As of today, funding has a green check mark next to it and my application says its in final review. I got an email stating everything looks fine and they are just waiting for investors to back the loan. However, I looked on the manual investing website but I dont see my loan on there. Do you know anything about this or how it works? Im trying to find out how much of my loan is currently funded. Thanks
Hi Ashley – If it’s not showing on your loan, you’ll need to call them and find out what’s happening.
This company is full of air …. I am 690 beacon ..job over 125000 a year … but somehow how got turned down .. then they send you to another company to shop u around and hurt your credit …. don’t believe the hype…I went to my credit union got a loan fast …these people are waste of your time …don’t let them use your credit and your name to shop around …. do not trust
I prefer Prosper, but Lending Club is a great place and alternative. Can’t deny these solid returns for Peer to Peer lending/investing. Great post!
Is there a limit to how much you can invest with Lending Club?
@Alvin I’m not familiar with any limits. The minimum to invest with Lending Club is $1,000.
That’s good to know. I ask because I read on another site that you must have at least $70,000 income to invest, and they do not let you invest more than 10% of your income. I just hoped that wasn’t true.
Alvin,
That is what is stated; you must have an income of $70K or more and you cannot invest more than 10% of your income; $7K in your case.
I reside in Canada, does Lending club operate in Canada. can someone in Canada Invest in Lending club?
Hi Obiora – I wasn’t able to find any reference to Canada on the Lending Club website, but a couple of review sites indicated that it’s not available there. But my guess is that they’ll get there eventually. P2P investing is new, and is spreading out fast.
I’m coming into $10,000 in a couple of weeks. I read your article about Lending Club and I’m thinking about investing $5,000 for a short term gain.
Do I sign up on this site or where do I go to invest?
Hi Michael – You can just click on one of the links in the post and it’ll get you right where you want to go.
Boo Hoo, as a PA resident, I am unable to participate in Lending Club investing. I can find no direct reason, except PA stinks!! To protect us? Hmm.
I just had some unexpected extra cash that I wanted to invest.
Anyhoo, your YouTube video and article were very good. Thanks anyway.
Isn’t kind of misleading to say that LC “…takes the banker out of banking.” since actual loans to the borrowers are originated by WEBBANK of Utah. Further no investor directly “funds” the loan but acquires an unsecured debt against LC. LC is very honest that they have NO legal obligation to pay a linked loan debt if the debtor ceases to pay.
Hi Scott – Not necessarily. Webank acts more in the administrative role in creating the loans. They don’t actually fund them, otherwise all the investors would be getting no more than 1% or 2% on their money. The act more as a temporary warehouse.
Same in Texas but I buy notes off of the secondary market or their Folio Platform. I am not sure if it is the same for your state but Texas allows you to buy loans from people that have invested in a loan and are reselling it
Thanks for the heads-up Peter!
One of the downsides to Lending Club is the hefty fee for taking money out. I tried to take $1000 out to invest elsewhere and was told the fee would be $100. On an IRA.
Can someone from outside the US invest?
Hi Peter – Technically yes. But Lending Club requires that you have a Social Security number, a US bank account and that you reside in a US state where they can legally operate, which means that you’d virtually have to be a US resident or citizen. Sorry there isn’t a better answer.
Hello Jeff,
thanks for the comments. I am currently living in USA but will be gone in two months back to my country. Still I need to keep an account here for some months and instead of letting the money do nothing, this is a good option. I currently have SSN, bank account and reside here. But in two months I am gone. Can I still use this service with my current information, go away and keep my account even if gone out of USA? both as investor and eventually borrower?
Thanks!
Hi Juan – You’ll have to find that out from Lending Club directly. They have rules in regard to opening an account, but I don’t know if they extend to your continued residency status.
Thanks for another great article Jeff. I had not heard of Lending Club until listening to your podcast, after doing some research it appears to be a great product. I have heard you mention portfolio diversification a few times. I understand the concept of using this instead of other investments options (e.g. stocks), but I have been trying to decide if this diversification mitigates any risks. As we know, the financial markets can be shaken at any news. The most recent news of Brexit has hurt the markets before any losses have taken place. Stock markets tend to be preemptive and news based, while products like Lending Club aren’t impacted until actual results take place. Actual results in this tense would be job loss. I look at market trends as indicators for future results on other investment tools like Lending Club. This results in Lending Club not having an impact yet, but a good sign of increased risk in the future.The markets may crash first, but if we enter an economic downturn this type of investment will also receive negative implications.
Long story short, what are your thoughts on the correlation between these investment options? Would you advise investors to stay away from Lending Club in a time where we predict a near economic recession? Or does Lending Club have underwriting requirements in place that can serve as a great alternative in unfavorable market conditions?
I believe the correct option is targeting high-quality credits (over 740 FICO). Your return won’t be as good, but your risk will be less. This appears to be a great alternative, yet it does tie your money up in a low rate environment for 36-72 months.
Any thoughts on using this for mitigating risk in other investment areas while still receiving a great return?
Hi Sean – That’s a complicated question, since the answer involves a large dose of predicting the future, which no one can do. But I get where you’re coming from. The history on P2P lending isn’t deep, since the industry was very young during the last recession. But it might help if you go to Lending Club’s Statistics page and it will show you the performance of the different credit grades at different time periods. You can go to the interactive chart on the page and plug in the numbers. I did it for the timeframe between 1Q 2007 and 4Q 2009 – roughly the period of the financial meltdown. What I found is that while the lowest credit grades performed poorly, the highest grade loans – A – turned in a gain of greater than 5% per year for all three years. When you consider that stocks were down more than 50% at one point in that timeframe, 5% per year looks really good.
What are your thoughts on the Lending Club scandal?
Hi Rebecca – I’m certainly disappointed, but I want to wait and see how this plays out. It may look very different a year from now. One good thing that comes out of situations like this is that companies often improve their processes in response. In the end, it could make Lending Club a more secure platform. We’ll have to wait and see.
I’m interested in peer to peer lending but not sure how it works if I want to sell my notes. How liquid are they?
@melanie
I definitely wouldn’t compare peer to peer lending to CD’s or a money market account. I would view it more like a 3-5 year investment.
That being said, peer to peer lenders will use a third party to sell the notes for you in what is considered a third-party marketplace. You have to list your notes there and wait for buyers to pick up your notes. Buyers may pay full price or you may have to sell at a discount to sell your notes. This whole process can take anywhere from a few days to two weeks (also considering the time it takes to ACH the money from your P2P account to your personal bank account.
How does Lending Club compare to traditional bank or credit union loans? Could you provide an idea of the difference in rates?
You can get double digit returns on Lending Club, but it will be hard to get anything better than 1% on banks and credit unions. I wouldn’t recommend abandoning traditional savings, but you might mix in some Lending Club investments to improve the overall return on your interest bearing holdings.
There’s always been a debate on whether a personal loan is the right move to use it to consolidate your debts. Think the consensus is that a personal loan will typically save you money vs paying minimum payments on credit cards, why is that? Is it because interest is calculated differently on personal loans than credit cards?
Hi Jeremy – It’s partly because you can often get lower interest rates on personal loans (but not always), but also because personal loans are term loans. You pay them off in three or five years, which saves you a lot of interest. As revolving debts, credit cards are like perpetual debts. You pay a fortune for them over a lifetime.
Mr Rose I must say of all the hogwash opportunities I’ve looked this is the most honest and understandable one. I want to try this only have little money 100 . great article by the way. I have a very short attention span and I read it all. If I do this youve got my vote. Thank you.It sounds like something I could learn and get better at.
Thanks for the review. I’ve never really gotten into investing in debt, but I’ve thought about it a lot. I’ve been more into ownership investments up until this point. Perhaps I’ll give it a shot and see how it goes.
Hi Jeff, I was just looking at the stock trends for Lending Club and it looks like they have steadily gone down since December 2014. Would you still recommend investing your money in this platform based on this information?
Laura
Hi Mr.Rose, Peace and blessings to you and yours this day. I have watched your videos and read up on the lending club. Presently I am in the process if setting up my own account with them as an investor.
I do wish to ask. In your opinion, is this a good vehicle to generate residual Income? As that is my primary intent in investing.
Second, if the results from.investing are residual, can I have them directly deposited to my bank accounts ?
Thanks in advance,
Jon
@ Joh With Lending Club (or any other P2P lender) they can accomplish what you are seeking: passive residual income.
I’m not sure about having it automatically deposited into your account. You would have to check with them. I do know you can have a direct line into your checking account and it’s easy to move funds between the two accounts.