rate of return Archives - Lazy Man and Money

A couple of weeks ago, I went to Finovate Start-up to learn whatever I could from various financial company start-ups and report back to you. I hoped to find three or four gems in the 40 companies that presented. One of the companies that I was least interested in was Zopa. In the UK, Zopa is a very successful peer-to-peer lending company. This lead to their widely anticipated US release. When the product was introduced, critics universally panned the service. For the investor, Zopa is basically a CD – you get a guaranteed fixed rate of return. For the borrower, you get a loan without ever having to deal directly with a bank. There simply didn’t see anything “Finovative” about the company.

At Finovate, they reinvented their reputation. By the end, they had one the coveted award of Best of Show. I was stunned. How did they do it? Borrowers can pay negative interest rates.

Let me repeat that, because it took me a bit to wrap my head around it… you can pay negative interest rates. How can that happen? When someone invests in a Zopa CD, they choose a borrower to help. This “help” reduces the rate that the borrower has to pay back. Zopa showed a couple of examples where borrowers are paying negative interest due to all the help they’ve received.

So if the borrower can make negative interest, the investor must be getting the short end of the stick right? Not exactly. A Zopa CD pays 3.75%, which compares well with the US Avg (2.90%) as well as the Top 10 US Bank CDs (3.65%) (source: Bankrate.com, 24-Mar-2008). The Zopa CD is insured up to $100,000, so it’s a steady investment if you like the returns on a CD.

I didn’t need a loan, so why did I get one? I have often written about peer-to-peer lending. I created the Carnival of P2P Lending. I felt that it would be interesting to be on the borrowing side. Most importantly though, I wanted to experiment to see if I could achieve a negative interest rate. If I can’t achieve a negative interest rate through connections like you, the odds are very long against the average Joe doing it. So the results of this experiment lie in the Lazy Man community… If you want to help me achieve a negative interest rate simply visit my Zopa profile and click on the Help Me Now button. I put up my favorite YouTube clip and a couple of pictures on that profile for your enjoyment.

Before my wife reads this and I get a nasty phone call… Honey, I only took a $1000 loan – the lowest amount possible. I got the lowest possible interest rate 8.49%. This means that if I keep the loan for a full year, I’ll pay around $85 to run this experiment. If I don’t receive significant help in 6 months, I’ll probably cancel the experiment and declare the negative interest rate hype and not something that one can expect. I’ll also keep the money that I borrowed in an interest bearing account, which means that it will cost less than $85 in total. With our net worth, income, and spending, this doesn’t really amount to much. One could even claim that it was worth it to realize that I was able to get the best interest rate that Zopa has to offer despite being self-employed.

Today’s post comes from Miranda Marquit. She writes about personal finances for YieldingWealth and edits debt consolidation information for Destroy Debt.

The “economic stimulus” tax rebates have begun arriving, and now people are wondering how to spend them. Instead of blowing all that cash on something you don’t actually need, why not put part — or even all — of that money to work for you through investing? Here are 4 investing ideas for your “economic stimulus” tax rebate check:

Retirement account – If you aren’t putting the maximum amount into your retirement account, why not use that tax rebate check to bring it up to scratch? Even with a modest rate of return (around 7 percent) over 20 or so years, you can make a big difference in the end result if you put the money in your retirement account.
Index funds – In general, the stock market is struggling a bit. This means that now is an ideal time to get in (you know, the old “buy low, sell high”). You can buy more units for your money. And if you choose index funds, you can enjoy instant diversification. Over time, the stock market gains. You can take advantage of that buy getting in now, even though the returns are modest, averaging between 7 and 11 percent.
Cash – This is not going to get you a great return right now. But cash investments (like a high yield savings account or a CD) can be a good way to build your emergency fund. And they are safe, if you use a bank that is FDIC insured. You can pad your “rainy day” fund with an infusion in the form of your tax rebate check. The money will grow (albeit slowly), and offer you a bit of a safety net. Besides, the Fed has to start raising rates again sometime. When that happens your savings account yield will increase, and you can ladder CDs into something with a better return.
Growth stocks – If you’re the type of person who can stomach a little more risk, this might be a good opportunity for you invest in some growth stocks. These stocks are riskier, and you could end up losing the money, but it you choose carefully, you just might parlay your tax rebate check into some serious stimulus for your investment portfolio. One of the more promising sectors is clean tech.

What you choose to do depends on your risk tolerance and your investing style — as well as your individual needs. But no matter your decision, you can put this “found” money to work.

Zopa Scam? I Borrowed Money On Zopa. Here’s Why…

4 Investing Ideas for Your Economic Stimulus Tax Rebate Check