After China (another story…), the USA is the largest peer to peer lending market. The most successful platforms like Lending Club or Sofi have originated tens of billions of dollars in loans. Yet for an outsider it can be very difficult to begin to understand the US P2P lending market, particularly when you don’t have an insight into how retail savings work or how people think about their personal finances. Thinking about the UK, most retail investors would not think about investing in P2P before considering popular alternatives: ISAs, SIPPs, retail bank savings, BTL property or general stocks and shares brokerage accounts. Within those, they’d consider the tax advantages, allowances and protections like FSCS protection on bank savings. This article is an introduction to the US P2P lending market for outsiders.
US Retail Saving & Investing
Traditional Savings Accounts
Most people have the ability to access a simple savings account, which currently bares little to no interest. The FDIC (Federal Deposit Insurance Corporation) insures all deposits up to $250,000. Most banks in the United States offer around .01% to .05% for a standard interest baring savings account. There are better options for people that have larger sums of money to deposit, but it is only marginally better. A savings account is the safest way to begin saving your money in an FDIC insured account.
Another option is a money market savings account. These accounts are still FDIC insured. A money market might offer slightly higher interest rates than a traditional savings account. Like a savings account the funds are still liquid, meaning you can withdraw them at any time. When interest rates are higher these interest rates are more appealing to the retail customer. The downside is a higher minimum requirement for your first deposit ($10,000 for example) and a limit by the Federal Reserve to six transfers or withdrawals a month.
These types of savings are designed for retirement. They allow people to put in pre-taxed dollars and invest them how they see fit. The benefit to this is that a large number of employers in the United States match to a certain percent: essentially free money. Similar to the shift from Defined Benefit to Defined Contributions pensions in the UK, the 401k is quickly taking the place of traditional pensions, as it eliminates the employer from having to guarantee a payout at the end of your career. If an emergency arises, you can take a loan out against your 401K.
The negative side to this is the money is stuck in the 401K once it’s in. Of course you can withdraw the money early, but there is a steep penalty for doing so. There are rare instances where you may be able to withdraw a portion of the funds, but you must fit a strict criteria the IRS has. These are great for retirement savings, but not for funds you might need a few months down the road.
IRAs (Individual Retirement Accounts)
There is another saving mechanism called an IRA or Individual Retirement Account. Do not get this confused with a 401K, as they differ in contribution limits as well as investing opportunities. Also, employers offer a 401K plan while an IRA can be opened by any location offering IRA services. Lastly, a difference is a 401K usually has a defined list of what a person may invest their funds in, while an IRA has almost limitless boundaries in terms of investment opportunities.