Inflation is 3 to 6 %. Are You Earning Only 1.5%?.

Try Micro Lending.  Never heard of it?  Read on.

Interest rates on CD’s are very low, but you don’t want to take the risk of investing in dividend paying stocks?  A recent article suggests you can make up to 10% annual without investing in stocks or bonds using a web-based version of micro lending.

With official inflation hovering above 3%, and the real rate - including the types of things every consumer needs to buy, like energy and food - well above 6%, half-a-percent interest simply doesn't make the grade.

Thanks to technology, new alternatives have been developed that allow individuals to earn serious interest without investing in the stock market or bond market.   It’s called Peer to Peer lending (or P2P)

Companies with websites will allow you to invest in consumer loans, loans normally made in the past by banks.  Consumers pay 10% or more (or less with high credit scores) and yet they find borrowing from these P2P websites better and cheaper than borrowing from banks.  Apparently default rates are not that bad either.

With P2P lending, an individual investor doesn't make a single $10,000 loan. Instead, he can buy 200 or more different loans, taking only $25 or $50 of risk per loan. You can choose your risk tolerance, the more risk you take, the better the return, but some will default, of course.

"A" grade loans might earn you only 7% and predictably low defaults.  The other extreme might be debt-consolidation loans for borrowers with much lower credit scores, but you could earn 10% or more.

At  Lending Club   www.lendingclub.com you can read all about how this works.  This website or “club” lends about $36 million a month.   Investors with more than 800 notes in their account supposedly have earned positive income after fees, with (supposedly) 93% of those investors earning between six and 18% interest

Lending Club is not the only one; there is a site called Prosper  www.prosper.com  Prosper is more like Ebay, an auction format, where the interest rate is set by the lenders through bidding. Lending Club sets the interest rate based on a formula, and lenders either accept that interest rate or not; there is no bidding.

A name sometimes used for this type of lending is Micro Lending.  I first heard about this in an overseas environment, where other sources of lending are not available for typical borrowers. These borrowers (I have read) tend to be very thankful for the working  capital and use it wisely, and pay it back.

Prosper has funded some $300 million in loans since its inception in 2006 through the end of 2011, compared to the $500 million funded by Lending Club in the same time frame.

Both sites, I think, lock up your money for 3 years. If you are to comment, or have invested in one of these, please write up a comment to this post.  We would all be interested in real life experiences of real investors.