Before investing money in Prosper or Lending Club Loans, I decided to list several reasons to not invest in P2P loans. Where should I reasonably put my money first â€“ before P2P lending? I am in the process of funding my Lending Club account, so I decided to make a quick check list to determine if P2P lending is the correct choice.
There are several other investments that one should invest in before P2P lending include an emergency fund, credit card debt payoff, 401K, Roth IRA, and a home. Not all are applicable to every individualâ€™s situation, but I will detail better options where most people should use their money before P2P lending.
Do you have an emergency fund to cover three to six months in expenses in liquid assets? I prefer six months. Everyone needs to keep an emergency fund in case of unexpected expenses or loss of income. I do not keep my entire emergency fund in a money market or savings account. I keep a small percentage in a short-term bond index fund and in a total stock market index fund. All these investments are easy to convert to cash in case of emergency. P2P loans are not a liquid form of investment â€“ less liquid even than a home. You currently cannot resell them or borrow against them in an emergency (like you can with a HELOC.) I consider an emergency fund an investment in financial security and peace of mind.
Credit Card Debt
Do you have any credit card debt at an interest rate higher than about 8% (or about to reset to a higher rate)? If so, pay that credit card debt off before you invest in P2P loans. Your credit card can provide an additional emergency cushion but only if it is not maxed out. Why earn 8-14% on a P2P loan, when you are paying 18-22% on a credit card? Even if your interest rate is low on the credit card debt, I would still consider paying of the credit card before P2P lending if the balance is high.
401K Savings Plan
If you are eligible, are you investing in your 401K plan at least to the amount that your company matches? If not, you are likely passing up the biggest return on your investment available. The company where I work has a fantastic, but very unique plan, so I won’t mention the details. I am taking full advantage of it and it is paying off very well. Including h match, I have been able to save 22-30% of my pay annually over the last few years.
If your income is not so high to prevent you from investing in a Roth IRA, you should first max out your Roth IRA before investing in Prosper or Lending Club. The Roth IRA is a fantastic investment opportunity. You pay no taxes on your capital gains, interest or dividends as long as you take the money out after retirement age. Even better, if you need the money in the event of an emergency, you can withdraw up to the amount you have invested at no penalty. If you think that you might need some of your Roth IRA investment for an emergency fund, remember to invest more of the money in less volatile investments such as bonds. I have not quite met this prerequisite but I will have met it before the deadline to invest in 2007 â€“ April 15th, 2008. Currently, the income limits on Roth IRAs are $114,000 for individuals and $166,000 for married couples.
If homeownership is right for your situation, do you already own a primary residence? Generally, a home would be a better investment than a Prosper loan. However, I do not believe you should pay off the primary mortgage before investing P2P loans. (Of course this varies by personal situation, location, and interest rate.) Usually, a mortgage is the cheapest interest that you will pay because the interest is tax deductible. Just remember to carefully read the terms of the mortgage so that you do not end up in the same circumstances as many people who borrowed using introductory rates, ARMs, or jumbo payments â€“ foreclosure.
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