Reader Ben asked me whether it would be a good idea to invest some of his spare cash in peer-to-peer (“P2P”) lending, such as Lending Club or Prosper.
Lending Club and Prosper offer a platform where investors can lend to a pool of individual borrowers, bypassing banks. They are both pretty transparent with their loan performance data. This chart from Lending Club shows a seasoned portfolio had a median return of 6.9%, with the 10th percentile at 5.4% and the 90th percentile at 8.6%.
Considering that bank accounts and bonds don’t pay that much these days, this level of returns look pretty good. When I asked Ben how much money he was thinking of investing in P2P lending, he said $2,000.
I told him no, because there’s a better way to make a higher return with no risk and less work.
[Update on April 23, 2016: Santander Bank notified customers it will discontinue this product after June 2016.]
Go to Santander Bank’s website: www.santanderbank.com. Santander (pronounced as “saan-taan-DARE”) Bank, formerly Soverign Bank, is a bank headquartered in Boston. It’s owned by Santander Group in Spain, which owns Banco Santander, the largest bank in the Eurozone.
You will see this on Santander Bank’s home page:
Clicking on Learn More from there will show this:
That pretty much sums up the deal:
- You open the extra20 checking and savings account package.
- You make direct deposit(s) totaling $1,500 or more in each statement period into the checking account (ACH push credits into it from some banks or credit unions also count; see below).
- You use its bill payment service to pay two bills, which can be scheduled as recurring.
- The leftover money can be pulled back by ACH as there is no minimum balance requirement and no monthly fee if you have the $1,500 direct deposit.
- The bank will credit you $20 each month into the savings account after the statement closes.
That’s it. Investing Ben’s $2,000 spare cash this way will earn $240 a year. That’s a 12% return, easily beating P2P lending, with full FDIC insurance.
It requires less work than P2P lending as well. The direct deposit, the recurring bill payments, and the ACH pull out can all be set on auto pilot up front. Once it’s set up, it just runs on its own.
I’ve had the extra20 package since November 2013. It works exactly as advertised.
Now some pointers if you also want to get a better return than P2P lending with no risk and less work:
1. After you do the online application, you will get an email with a link to your online application. It’ll process faster if you go back in and upload the identification documents it needs: a copy of your driver’s license and a utility bill.
2. After you get the email saying your application is approved, just wait. You will get a letter in the mail with your account numbers. You will get another letter in the mail telling you that you use your Social Security Number as your login ID when you register for online banking. You will get a third letter with your temporary password. Register for online banking only after you get all three letters.
3. The routing number is 231372691. Use it to set up your ACH. You will also get it in one of the letters.
4. If you are not familiar with the Fiserv CheckFree bill payment interface also used by many other banks, scheduling a recurring bill payment can be a little unintuitive. First you add a biller under “Add a company or person to pay.” Then you go to Manage My Bills, select the biller, and then “Add an automatic payment.”
You can pay the same payee twice on different days in the statement cycle or you can pay two different payees. Most bills (electricity, Internet access, credit cards) take partial payments. You can schedule two fixed dollar payments from here and still pay the remainder the usual way from your current bank.
5. Statement period starts from the date your accounts are opened.
6. If you want to use ACH push as direct deposit, it works from some banks or credit unions but not from some other banks or credit unions. The ones that don’t work code their outgoing ACH transfers as P2P payments, which Santander doesn’t count as direct deposit.
Of course the 12% return with FDIC insurance is limited to $2,000. But if you are not willing to risk more than that on P2P lending anyway, it makes sense to go with the bank accounts.
P2P lending would only make sense when you are investing $20,000, or ideally $200,000, where a 7% median return would make a difference, but then again you would have to question whether you really want to risk that much in P2P lending.
If you still want to invest in P2P lending, sign up using my affiliate link (tongue in cheek).
[Photo credit: Flickr user Jeremy Vohwinkle]
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