Wise Bread (Xin Lu)

The Process for Purchasing a House With Cash

Xin Lu — Mon, 30 Jan 2012 10:48:22 +0000

Several years ago I wrote an article about the pros and cons of paying cash for a house. Some readers asked me how this can be done and what the procedures are. Last year my husband and I actually did purchase a property with cash, and here is our experience. (See also: How to Live a (Nearly) Cash-Only Life)

The property we bought was listed on the public multiple listing service. It was bank owned, so I called the listing agent and asked for an appointment. The listing agent immediately told us that the bank could only accept cash offers at this point because the property already has another cash offer on it. After seeing it and finding that it was in great condition, I made a pretty fair offer that was about 95% of the listing price. I also had to submit evidence of my funds along with my offer. The bank gladly accepted, and I sent in an earnest deposit check for $5,000. This check was then put into escrow towards the purchase of the house.

Next, we hired an inspector to look at the property to see if there are any defects. Unfortunately, the air conditioning system was broken, but the bank refused to pay for it, and we agreed to fix it out of pocket. The bank did agree to pay for title insurance, half of the escrow fee, and clear all liens from the property. So I made sure that all the unpaid bills and taxes on the property were paid before closing.

Meanwhile, I was gathering my funds all into one account so that I could send it into escrow before closing. We were able to choose our closing date to be the end of June, since we didn't have to deal with a loan. This was advantageous to us, since the bank had to pay all the property taxes for the first half year. I asked for the HUD closing statement about three days before closing and made sure that everything looked correct.

On the day before closing, I made sure all the funds were in my account and then sent the money to escrow. Everything went fairly smoothly, and the whole process took about three weeks from looking at the property to getting the keys. The closing costs were less than 1% of the price of the property because we didn't have to deal with a loan.

We were able to fix the air conditioner for a very fair price, and we rented the property out after several weeks of open houses. Now that we've owned the property for more than six months, we are actually eligible to take money out via a cash out refinance, but we don't need the money right now. The point is that if we didn't make a cash offer, then we would not have been able to procure this property at all. Basically, the process to buying a house with a cash on the open market is pretty much the same as buying a house with a loan, but you have more flexibility on the closing date, and that is a competitive advantage over offers with a loan contingency. You don't have to sign as many papers, but you still have to do your due diligence and make sure that you have a bit of cash buffer left over after the purchase for possible repairs and improvements.

What do you think? Are you thinking of buying a house with cash?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

Tips for Thriving in Long-Term Unemployment

Xin Lu — Mon, 02 Jan 2012 10:48:08 +0000

The sagging economy forced many people from their jobs and left the young and old alike searching for income. According to the U.S. Bureau of Labor Statistics, 8.6% of the U.S. labor force is unemployed, as of November 2011, and the unemployment rate in the U.S. has remained in the 8-10% range since February 2009. Additionally, millions of the long-term unemployed have fallen off the official unemployment rolls, and these folks are labeled as "discouraged workers." Here are some tips to making your long-term unemployment an opportunity for advancement. (See also: Help! I Lost My Job!)

Use All of Your Resources

There are many new and innovative job resources available to help you find a job and put some food on your table. Many community colleges and community centers host career fairs to allow members of the community to meet prospective employers, so be sure to check your local listings for career fairs in your area. If you went to college, you still may be eligible for career guidance from your school. Consider contacting a career counselor at your alma mater or checking your school’s career advising websites for job postings in your field. Otherwise, social media has turned many websites into personal job boards. Check for job postings on sites like Mashable, LinkedIn, Twitter, and Facebook. Some of these sites have separate areas for job postings, but your friends may also post an opportunity in your newsfeed.

Build Your Resume While Unemployed

It sounds horrible if you tell a prospective employer that you’ve been doing nothing but searching for a job for the past three years because you were unemployed. Instead, find something to productively occupy your time. Volunteering is a great way to gain job experience to put on your resume and show potential employers that you’re a productive go-getter. Most businesses, political campaigns, organizations, hospitals, and religious groups love having extra hands to assist with free labor. Look for opportunities in your field or in a field you’re passionate about, and see if a business or organization in that field will let you help out for a few hours a week. You’ll pick up some job skills and experience, and you can add the extra line to your resume to show that you were not sitting on your butt while the unemployment rate was high. With the 2012 elections coming up, there are many opportunities to volunteer for your favorite candidates.

Learn New Things

Look for training classes in your area that you are interested in. It is possible to start a completely different career than what you had before. I have heard of laid off police officers who became barbers and laid off engineers who went back to school and became dentists. It really depends on your interests and motivations. You could also just go to the library, borrow books, and learn skills. You could even read about how to improve your interview skills.

Supplement Your Income With Odd Jobs

Babysitting and mowing lawns may sound like jobs for teenagers, but young people do them because they provide quick, easy, and tax-free money. Do your kids’ friends always need rides to school or after-school activities? Consider forming a chauffeur service for kids in your neighborhood. Also, there are multiple, legitimate opportunities to make money online. From taking surveys to writing blog posts, there are virtual odd jobs that can fit anyone’s interest and skill level.

Work on Your Own Business

I have talked about having your own side income before, and if you are unemployed it is actually a great time to work on a side business. You have more time to try out different ideas that you had and perhaps bring your business to the next level. Sometimes being unemployed lights a fire under people's butts and successful businesses are born. The key is to use your energy and time in a productive manner.

The job market may be dismal, but there are still so many opportunities for financial gain, no matter how big or small. Be creative, be enterprising, and find your opportunities. Remember that every dollar helps, and every work opportunity may open a new door for you. Use your unemployment as an opportunity for advancement and don't be a "discouraged worker."

What are your experiences? Have you been unemployed for more than a year?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

When Being Frugal Isn't the Solution

Xin Lu — Tue, 29 Nov 2011 11:24:30 +0000

Here at Wise Bread, we have a lot of articles on how you can become more frugal and still enjoy a great lifestyle. All of these articles are very useful, but sometimes being frugal isn't the solution to improving your life. Here are some instances when frugality isn't the whole answer, and some additional solutions for achieving a happy balance. (See also: 12 Frugal Compromises)

When Your Savings Are Limited by Your Income

If you are trying to achieve financial goals simply by spending as little as possible, then you are ultimately limited by how much income you have. Some readers have written to me and said that it is impossible for them to save just because their fixed expenses eat up most, if not all, of their income. Most of them are not lavish spenders, but are just making so little that they're surviving paycheck to paycheck. In that situation, it's better to focus more on increasing income than saving nickels and dimes. If you think about it, an extra $25 earned a day equates to $500 a month, and that side income will definitely help pay down debts faster.

When Being Frugal Is Wasteful

I have seen those extreme couponing shows, and it actually scares me that some people buy so many boxes of processed foods. I'm not sure if all that stuff actually gets consumed, but I have seen many instances where people bought so many of something just because they got a good deal, and then a lot of it went to the trash. With the rise of deal sites like Groupon, I've also heard of stories of many paid coupons that aren't redeemed. I am a fan of looking for coupons for the things I need immediately and buying just enough, and I really like Phillip Brewer's article on shopping European style. I think more people can actually save money by buying what they need on demand instead of buying too much of something on sale.

When Frugality Makes You Unhappy

A phrase that has been popping up lately is "frugal fatigue." Basically, it means many people became frugal due to the recession, but now they are sick of pinching pennies and out to spend again. I've heard stories of people giving up their coffee or changing the grocery store where they shop, and it's the mentality of sacrifice that makes people unhappy. I think as long as you can comfortably afford something, then there is nothing wrong with treating yourself once in a while. Sometimes happiness costs very little, and you don't have to feel guilty about spending.

Ultimately, I think that a combination of living below your means and generating extra income will help you reach your financial goals faster. You can't just concentrate on looking for deals and clipping coupons to improve your financial situation. Just like a well-balanced diet is good for your physical health, a well balanced set of financial actions will improve your financial health.

What do you think? Are you too fixated on saving money and not on earning money?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

Should Conforming Loan Limits Be Increased?

Xin Lu — Tue, 25 Oct 2011 09:36:14 +0000

On October 1st, 2011, the conforming loan limit for loans backed by the FHA, Fannie Mae, and Freddie Mac fell back down to the levels they were at before 2008. Less than a month later, the Senate has passed an extension of the law that raised those limits. Now the bill is going to the House for approval. Here is how it may affect you. (See also: Guide to Home Loans)

First of all, let me explain what a conforming loan is. Basically, a loan is "conforming" if it is smaller than the limit that the FHA, Fannie Mae, or Freddie Mac set. Conforming loans can be purchased by these agencies, so these loans are more liquid, and borrowers with conforming loans qualify for the best mortgage rates. If a loan is larger than that limit, then it would be a "jumbo loan," and the interest rate is generally a percent or more higher than a conforming loan. Right now over 90% of new home loans are backed by FHA, Fannie Mae, or Freddie Mac, so new house purchasers should know that if their loans are larger than the conforming loan amount, they would be more expensive and less likely to be funded.

Fannie Mae and Freddie Mac currently have a conforming loan limit of $417,000 in most areas, and a maximum of $625,500 in high-cost areas for a single-unit residence. FHA loans currently have a conforming loan limit of 95% of the median home price in an area or $625,500, whichever is less. In 2008, the Housing and Economic Recovery Act raised these limits significantly. The maximum loan amount for all the agencies was as high as $729,000, and the FHA loan limit was raised from 95% of the median home price to 125% of the median home price. Basically, now the lawmakers want the loan limits to be back to the limits under the 2008 law.

This loan limit issue affects FHA borrowers the most, since the difference in the loan limit in many areas changed more than 30%. FHA buyers typically only bring 3.5% of the home cost to their down payment, so basically the loan limit is the maximum price of the house they are purchasing. The good news for today's buyers is that housing prices have already come down more than 30% since 2008 in many areas, so the change in limit might not be a big deal because many houses are just plain more affordable.

The loan limit issue also affects upper-middle-class buyers in high-cost areas. Here in the San Francisco Bay area, there are many upper-middle-class families who look for very basic two-to-three bedroom houses that cost more than $800,000. For these families, they may have to lower their price points by $100,000 or pay thousands of dollars more every year.

Personally, I believe that the government should not encourage more debt by raising the limit. If you look at a history of the conforming loan limit, then you will see that it was raised drastically during the housing bubble. If large government-backed mortgages were not so easy to come by, then people might have bought cheaper homes, and perhaps we would not be in the situation we are in right now. I actually think that these loan limits should be decreased so that the private markets will have to shoulder more loans and more than 90% of the mortgage market is not backed by American taxpayers.

What do you think? Do you want the loan limits to go back to the 2008 limits?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

The Worst Investments You Can Make

Xin Lu — Thu, 01 Sep 2011 10:24:11 +0000

Generally, people love to talk about the best investments they have ever made, but we rarely hear about others talk about the worst investments they made. Good investments are those that maintain your principal and give you a positive return with time. The worst investments are those that burn through your principal and then continually pull money out of you without giving any return. The following are some of what I consider to be the worst investments. (See also: 7 Common Investing Mistakes)

Timeshares

Timeshares are set up by developers and hotel conglomerates to sell shared interest in their properties. They usually give great presentations where you can get a free stay at the property, and then they will try to sell you the right to use the property for a portion of the year. There is nothing wrong with this business model, but those who buy a timeshare directly from a developer should know that it is a terrible investment. First of all, the resale value of a timeshare is almost always lower than its original price. It's possible to find secondhand timeshares for 50% of the developer's price or even less on the resale market. Next, timeshares have maintenance fees that could be thousands of dollars every year. So if your intention for buying a timeshare is vacationing, it might be cheaper to just pay for the vacation yourself. If you don't use your timeshare for vacationing every year, then the money will be wasted. It is possible to rent out your deeded timeshares, but usually it is difficult to find a renter just for your time slot, and it's tough to recover all the fees you have to pay.

Penny Stocks

Penny stocks are stocks that are priced under $1 per share. They are usually at that price for a reason. The prices of these stocks are generally easier to manipulate because trade volumes are low. This is why there are many sites and marketers that promote penny stocks. If they get enough of a following, they can change the price of a stock on the open market and make it seem like it is easy money. The truth is that the promoters of the penny stock websites and mailing lists are the ones making the real money. There are legitimate penny stocks out there that appreciate suddenly, but to actually find them consistently can be difficult.

Badly Chosen Higher "Education"

It is often said that higher education is an investment in your future. However, there are many institutions of "education" out there that are nothing more than degree mills. Many of these schools accept nearly everyone who applies and leave the students with a pile of debt and low chances of employment in this competitive world. Recently there were several cases of students suing their alma maters after they graduated and were unable to find employment. I think more people should treat higher education as a financial decision and calculate the potential return before financing it with a huge student loan. It is fairly easy to look up the reputation of a school and the expected pay for your intended profession. If you do not choose carefully, then education funded by student loans might be the worst investment you could make, because student loans are not dischargeable.

Investments You Don't Understand

Many investments can be the worst investment you ever make if you don't do your research. For example, some investment products have fees and surrender charges that you need to clarify before you buy in. There are also investments such as rental properties or a small businesses that require you to put work into them to keep their existing yields. The bottom line is that you should get as much information as possible before putting any money down.

What are the worst investments you have ever made? Have you put money into any of the above and regretted it?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

What if the Mortgage Interest Deduction Went Away?

Xin Lu — Tue, 16 Aug 2011 10:24:17 +0000

Recently, the United States Congress raised the debt ceiling after a lengthy and ugly debate about spending cuts and tax increases. One of the issues discussed is eliminating or capping the mortgage interest deduction. This deduction is quite popular amongst the American people and is often heralded as the best tax deduction for the middle class. What would happen if it no longer existed?

In the United States, the mortgage interest deduction allows taxpayers who itemize their deduction to deduct the interest of up to $1 million of debt used for buying, constructing, or improving a residence or a vacation home. The deduction also applies to the interest on up to $100,000 of home equity debt. This means that those with large mortgages and high tax rates benefit the most. (See also: The 7-Year Mortgage: Take It or Leave It?)

It is no surprise that a recent report by the Tax Policy Center shows that most of the tax benefits went to wealthy households. For many middle class families that buy an affordable home around the national median price of $184,000, the mortgage interest deduction may be moot because the standard deduction for a couple would be more than the mortgage interest. For these households, the elimination of the deduction would not change their tax liability. Those households that have large mortgages and already itemize will see their taxes go up without the deduction, but these households may just sell taxable investments to pay down the mortgage and break even on their total taxes.

The real estate industry is staunchly against eliminating the mortgage interest deduction because they argue that such a move will drag down home prices when the market is already weak. The deduction is also a great marketing tool for realtors. Practically every realtor I met has touted the deduction as a great reason for buying a home. I think prices may come down a little bit without the deduction in expensive markets where every mortgage holder takes the deduction, but in parts of the country where mortgage interest is smaller than the standard deduction it may not matter that much.

Even if prices drop, I don't think it will be catastrophic since housing prices are already severely depressed and many foreclosures are selling at or below replacement cost. According to the Tax Policy Center report, a little reduction in home prices may even raise homeownership rates because houses will just be plain more affordable, and that is not a bad thing.

If the deduction were eliminated, the Treasury would collect an additional $108 billion in tax year 2012. That is a decent chunk of change that could be used to chip away at the trillions of debt the country has. Although I do take advantage of the mortgage interest deduction right now, I would be happy if it went away because I don't think those who have small or no mortgage should subsidize other people's debt via the tax code. Ultimately, all mortgage interest goes to the banks, and I don't think it is good policy to encourage more debt and inflate housing prices for the benefit of large financial corporations.

What do you think? Do you love your mortgage interest deduction? Do you want it to be eliminated or reformed?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

U.S. Government Offers "Free" $50,000 to Troubled Homeowners

Xin Lu — Fri, 01 Jul 2011 10:36:16 +0000

A new program called the Emergency Homeowner Loan Program is offering a small group of struggling homeowners up to $50,000, and the money does not have to be repaid if the homeowners meet certain requirements.

This program has a funding of $1 billion and is being offered by the Department of Housing and Urban Development and the nonprofit housing advocacy group NeighborWorks America. Applicants apply for an interest-free loan from these groups, and the money goes directly to the lenders for a part of the borrower's mortgage and fees. This assistance runs up to two years or $50,000, whichever occurs first. After the two year period, 20% of the loan will be forgiven for each year that the borrower is current on his or her mortgage. Basically, the loan would be completely forgiven after five years.

The U.S. government is doing this because the Home Affordable Modification Program is winding down and that program has not helped as many people as it hoped to. The purpose is to keep people who have temporarily lost their jobs from losing their homes, and then hopefully these folks can find another job and start paying their mortgages again. However, this program isn't expected to make any significant impact on home prices since it will only help a small group of homeowners.

This is an amazing deal for those who qualify for the program since it is essentially "free" money if you comply with the terms of the program. To qualify, applicants must have lost income due to involuntary hardship and at risk of foreclosure. There is also an income limit to receiving this assistance and you can find the income limits of your county here at the EHLP Area Median Income Limits site. You also have to use the home in danger of foreclosure as a primary residence. This program is currently available in the following states and territories:

Alaska, Arkansas, Colorado, Hawaii, Iowa, Kansas, Louisiana, Maine, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Mexico, New York, North Dakota, Oklahoma, South Dakota, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming, and Puerto Rico.

To apply, you need to go to the NeighborWorks website and fill out a Pre-Applicant Screening Document. They are accepting pre-applications until July 22, 2011, and the final applicants will actually be selected by lottery since there are only about 30,000 applicants that will receive the assistance.

If you don't live in one of the states or territories participating in this program, then there are actually similar programs in all the other states. Connecticut, Delaware, Idaho, Maryland, and Pennsylvania have their own EHLP equivalent programs and you can apply for them in the links below:

Connecticut, Delaware, Idaho, Maryland, Pennsylvania

Here in California there is a program that gives struggling homeowners up to $3,000 a month in mortgage payments under the Hardest Hit Housing Market Program. You can find the program links for states in the Hardest Hit Housing Market Program below:

Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, Tennessee, Washington DC

Essentially the government is handing out free money, but you have to apply quickly and hope you get lucky. Personally I think that this will help people who have a home they can afford and just need a little time to get their income back up again, but for those who have a mortgage that they could not afford in any circumstance then this assistance is just kicking the can down the road.

What do you think? Would this program help you out?

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

How to Get Into a Good School District for Less

Xin Lu — Fri, 24 Jun 2011 10:24:19 +0000

If you have children in public school, then you probably chose where you live based on the quality of the school district. Often the areas with the best school districts have the most expensive real estate prices. Here are some ways to get into the good school district without buying an extremely expensive house. (See also: Live Where It's Cheap)

Rent

Generally schools do not care if you are a renter or an owner. As long as you live in a school district, your children are eligible to attend. In many of the best school districts in the San Francisco Bay area, it is much cheaper to rent than own a house. It is possible to rent in a good school district for a while and then buy a house in a cheaper neighboring town. This is what my parents did, and the school district I was in allowed me to continue in the same school after we moved. My parents bought a house right on the boundary of the school district, so I was able to walk to school. Since the house wasn't located in the good school district, it was about $100,000 cheaper than the houses on the other side of the line.

Apply for an Out-of-District Permit

Most school districts in America have some slots for out-of-district students who want to enroll. However, these permits are often issued on a lottery system and enrollment in the school you desire isn't guaranteed. Usually the out-of-district students have to maintain a certain grade point average at the school accepting them. The requirements vary from district to district, so you should look up the rules in your area.

Pay Tuition

Some coveted public school districts actually allow out-of-district students to attend if they pay tuition. In most cases the tuition is less than what private schools charge and also less than what a family would pay if they had to pay for property tax on an average-priced house in the district. If this is an option near you, then you could consider living in a less expensive town and paying for the good public school out of pocket.

I'm not familiar with how public schools work in other countries, but here in America living in a good school district can really cost an arm and a leg. I completely understand why parents want to purchase a home in a good school district, but it is entirely possible to send your child to excellent schools while living in a cheaper town and saving hundreds of thousands in the process.

What do you think? Did you purchase your home based on the school district?

[Correction: Post was updated by Editor and some parts were removed.]

Written by Xin Lu and published on Wise Bread. Read more articles from Wise Bread.

5 Tips for Remembering Names

Xin Lu — Fri, 10 Jun 2011 10:36:06 +0000

My husband has always said that I am great at remembering many details about the people we meet. One of the most important and basic things you should remember about someone new is his or her name. Here are some of my personal tips for remembering names; hopefully they will help you avoid an awkward "I know you from somewhere" moment. (See also: Remember Where You Parked Your Car and More: 35 Practical Uses of a Digital Camera)

Look for Distinguishing Features

When I meet someone, I always look for something unique in the way they look or act. The trick is to pick some feature that starts with the same letter as their name. For example, if someone has a very distinct mole and his name is Michael, then you can associate "mole" and "Michael" mentally. I have also memorized some people's names based on their left-handedness, the way they walked, or their accents. Try to find a feature that isn't easily changed.

Associate a Name With an Occupation

Usually people tell you what they do for a living. I find that it's often easier to remember occupations than names because there is always a story to that occupation. All you have to do is to weave a person's name into your mental image of that person's occupation. For example, if a person tells you that he or she is a nurse, imagine that you are at a hospital and that person has a nametag on with that name on it. You should be able store that image into your head and bring it up more easily later than just recalling a random name.

Repeat and Reintroduce

When you just meet someone new, try to say their name a few times while talking to them. Repetition always aids your memory, so introduce that person to some of your friends. You can also ask people to spell their names if you don't have nametags. If someone has an unusual name, it is especially helpful to get the pronunciation correct by repeating the name a few more times.

Associate Real Words With Names

Many names aren't real dictionary words, and that makes them harder to remember. If you see a person's name and associate it with a real word, somehow it is much easier to remember. For example, when I hear a name like Jaden, I think of the word "jade," and I associate the color green with that person. When I hear "Gladys," I think of gladiolas and associate that flower with the person's face.

Use Social Media

If you happen to like people you just met, you could friend them on Facebook or Twitter, where they will have pictures of themselves and links to their personal sites. At blogger meet-ups I have asked people for their Twitter handles and permission to friend them on Facebook or LinkedIn. When you have faces and names show up on your social media feed, then it is much easier to remember who they are when you see them in person. For the most part, I do prefer adding people who I have met in real life to my Facebook, and I find it to be a great tool to keep people's images and names fresh in my mind.

What are your tips for remembering names of new people in your life? What do you do when you can't remember someone's name in a social situation?

Written by Xin Lu and published on Wise Bread. Read more General Tips articles from Wise Bread.

Five "Jobs" for Children

Xin Lu — Wed, 01 Jun 2011 10:24:13 +0000

I have decided that my child will not have an allowance when he grows older because I do not want my son to feel entitled to getting money for doing nothing. He will have to earn his money. Here is a list of "jobs" that I think kids can do to earn their spending money. (See also: Hey Kids! It's Time Your Butt Got a Job)

Couponing

If your children are old enough to read, then they are able to help with couponing. Kids can help identify and organize coupons, and then parents can reward them with a fraction of the money saved. If a kid really wants to buy something, then I think it is also his or her job to find a deal on the item.

Household Chores

When I was nine, my parents paid me for washing dishes. Other common household chores like throwing out the garbage, cleaning countertops, and folding the laundry can also become paid tasks for a child. I think a child probably shouldn't be paid for cleaning up his own room and toys, but extra work such as organizing the garage or cleaning the kitchen and toilets should be rewarded.

Extracurricular Academic Work

In fourth grade we were rewarded Pizza Hut coupons for reading books and writing book reports. If you think of school like a job for kids, then I think it is okay to pay kids for academic work beyond what is taught at school. One thing I plan to do is to let my son write essays about any topic he wants. If they are sensible pieces of writing, then I would pay him for his work. Of course, he will have to do all his regular schoolwork first.

Recycling

In middle school I collected cans and recycled them for a few dollars every month. I think children as young as eight or nine can do work like crushing cans and sorting cans and bottles. You may need to drive them to the recycling center to redeem the goods for cash. It is a good way for a child to cut down waste and earn some money. In states where you can redeem cans and bottles for cash redemption value (CRV), the money could add up quickly. In fact, a teenage girl we know asked friends, family, and neighbors to contribute to her recycling, and she was able to save up enough money for a trip to Africa.

Yard Sales

Every once in a while kids can go through what they have and see what they want to keep and what they want to get rid of, and then they can organize a yard sale. I did this once when I was young, and I made about $23 after putting up signs around the neighborhood and cleaning out my room. I sold some of my old books and toys that were taking up space anyway. My mom supervised me and chuckled at the paltry amount I earned, but all that stuff would have gone into the trash or to Goodwill anyway, so I really lost nothing.

I believe that making children earn their money will make them appreciate it more. If your kids are too young to get a real job, then these are real ideas for how they can earn money from you and others.

What do you think? Do you pay your kids an allowance unconditionally, or do they have to earn it? What do you pay them for?

Written by Xin Lu and published on Wise Bread. Read more Family articles from Wise Bread.

Affordable Sustainable Seafood Choices for Your Table

Xin Lu — Thu, 17 Mar 2011 11:00:19 +0000

Humans have harvested the oceans for food for thousands of years, but unfortunately the bounties of the seas are not as endless as they seem. Commercial fishing technologies have advanced significantly in the past century, and marine ecosystems are threatened by over-fishing. For those who love seafood but also want to be mindful of the environment, here are some sustainable and affordable seafood choices. (See also: How to Shop for Fresh Fish)

Seaweed

For the vegetarians out there, seaweed or kelp is a very healthy and sustainable seafood. Seaweed grows quite fast and is commercially farmed in many places around the world. You can buy seaweed dried, fresh, or frozen at many Asian markets. Dried seaweed may look expensive by weight, but it does expand in water and flavors soups very well. Fresh seaweed can make great salads or garnishes. There are hundreds of types of edible seaweed, so it may take a bit of experimentation to find out which type you prefer.

Shrimp

Certain types of shrimp are great sustainable seafood since they grow quite rapidly. Farmed shrimp require very little food and produce very little pollution. The best farmed shrimp choices, according to the Monterey Bay Aquarium's Seafood Watch guide, are those "farmed in fully recirculating systems or inland ponds." As Myscha wrote in her post about cheap seafood, frozen shrimp does not lose much of its flavor, and sometimes you can get it quite cheaply. I have seen frozen shrimp on sale for less than $2 a pound. Also, smaller shrimps are usually cheaper, and they taste the same as the larger ones. For more on which shrimp are sustainable, read the Environmental Defense Fund's information on U.S. farmed shrimp or this article on post-oil-spill shrimp from Mother Jones.

Mussels

Mussels are around $2 to $5 a pound and available year round. About 90% of mussels consumed are farmed, and most of the mussels consumed in the United States are imported from Canada or New Zealand. Mussels are great in farms because they do not escape and are very disease resistant.

Catfish

Catfish are native to the United States and farmed in large quantities. Farmed catfish live in enclosed ponds and eat mostly grains. If you buy in bulk, catfish can be less than $2 a pound. There are also a lot of imported catfish from Asia on the market, but they are not exactly the same as the channel catfish from the United States. If you live in the United States, then the most sustainable and local catfish to eat are those farmed in the southern states.

To read more about sustainable seafood, read the Monterey Bay Aquarium's full Seafood Watch guide. The site also has a downloadable app for the iPhone that can give you up-to-date information about the sustainability of seafood. In general, the most sustainable seafoods are those that grow quickly and are farmed in regulated environments that are not polluted. Quick-growing sea creatures also contain little or no harmful chemicals such as mercury, and that makes them healthier.

What do you think? What is your favorite cheap and sustainable seafood?

Note: This post was updated to specify what kind of shrimp are sustainable.

Written by Xin Lu and published on Wise Bread. Read more Food and Drink articles from Wise Bread.

4 Ways Breast-Feeding Saves Money

Xin Lu — Mon, 28 Feb 2011 12:48:13 +0000

I breast-fed my son exclusively for the first six months of his life, and then I supplemented his meals with some homemade baby foods. For his first twelve months, most of his food was breast milk. I didn't do this out of cheapness, but I did save thousands of dollars on feeding my child. Here are some reasons why breast-feeding can save money. (See also: Cheap Way to Get Rid of Plastic Baby Bottles)

Breast Milk Is "Free"

I never knew how much baby formula cost until I started to look at baby products during pregnancy. Formula currently costs around $2,000 to $3,000 for the first year of a baby's life if purchased at retail prices. On the other hand, breast milk is produced by the mother from the food she consumes, so it is essentially "free," since the mother needs to eat anyway. Some women need to take in more calories than usual, but most women have enough fat stores from pregnancy so that extra food is not needed to produce milk. Personally I did spend a couple hundred dollars on breast-feeding equipment, and you can read my detailed account about breast pumps.

Breast-Feeding Equipment Is Tax Deductible

As mentioned in the previous section, you do have to buy breast pumps and other breast-feeding equipment if you intend to store your milk. A recent IRS ruling on breast-feeding equipment just made this expense tax deductible, so you can use your Medical Flexible Spending Account to pay for them. This means that you can potentially use pre-tax money to buy breast-feeding equipment, and that makes the costs even lower. This decision is stirring up controversy because many claim that this discriminates against non-breast-feeding moms, but that brings me to part of the next point, that breast-fed babies generally cost the government less in medical costs.

Breast-Fed Babies Are Sick Less Often

There are numerous studies that show that breast-fed babies are less likely to experience Sudden Infant Death Syndrome and other childhood diseases. One big reason is that breast milk carries many antibodies produced by the mother, and the baby gets some of the immunities against the diseases the mom has already experienced. A healthy child incurs very few medical costs, and in an analysis published in Pediatrics last year, the authors state that if all U.S. women followed the recommendation to breast-feed their babies exclusively for the first six months of life, then the nation would save $13 billion a year in medical costs.

Health Benefits to Mom

There have been numerous studies that show that moms who breast-fed for six months had less chance of developing diseases such as reproductive cancer and diabetes. Another huge benefit is that breast-feeding moms lose their pregnancy weight a lot easier than moms who do not breast-feed. This is because producing a full day's milk for a baby burns 500 to 600 calories. This is equivalent to running for an hour and a half. Personally, I lost almost 40 pounds in nine months on the "breast-feeding diet," which consisted of eating as much as I wanted and feeding the baby breast milk. My BMI went from overweight to the middle of the normal range, and I'm keeping the weight off. Less obesity and health issues for breast-feeding mom also means fewer medical costs.

Breast-feeding is a very personal choice, and it does not work out for everyone for many reasons. However, from a purely financial perspective it is the cheapest way to feed and care for your new baby. I am glad that it worked out for my family, and I really encourage new moms to at least try it out if possible. It takes patience and practice to get a good routine going, but it is definitely worthwhile. The money we saved on formula has already gone to our son's college fund, and in 17 years the couple-thousand dollars we contributed will hopefully grow into a tidy sum.

What do you think? Did you ever consider the financial benefits to breast-feeding?

Written by Xin Lu and published on Wise Bread. Read more Lifestyle articles from Wise Bread.

Save Money with a Dependent Care Tax Credit and FSA

Xin Lu — Tue, 01 Feb 2011 14:00:15 +0000

If you pay for the care of a dependent, then you may be able to save several thousand dollars a year via a dependent care flexible spending account (FSA) or the Child and Dependent Care Credit. Here is a quick guide to how you can maximize your savings:

Eligible Expenses

The expenses you can claim are usually the same for dependent care FSAs and the Child and Dependent Credit: the amount you pay to someone other than your spouse for the care of a child or dependent. If you are claiming expenses for the care of a child, the child must be under 13 years old. If you are not claiming a child, then the person you are caring for must qualify as an exemption on your tax return. Basically, your dependent must be unable to take care of himself or herself and have lived with you for at least half of the tax year. The expenses incurred also must be due to the need to work. You should keep detailed receipts of who provided the care and their tax identification numbers in order to back up the claim for your expenses. (See also: Tips for Choosing and Using a Babysitter)

The Dependent Care Flexible Spending Account

The dependent care flexible spending account is a common benefit at workplaces. It has a contribution limit of $5,000 per family, but the contribution is pre-tax, so you get to keep more of your wages. The money is taken out of your paychecks, and you can claim a reimbursement with a valid receipt from a caretaker or preschool. Because the FSA contribution is exempt from federal income tax, payroll taxes, and most state taxes, the maximum amount that families can save with a dependent care flexible spending account varies by their residence and tax brackets. For example, if you were a Californian with a 15% federal income tax, 9.55% state income tax, and a 7.65% payroll tax for a total tax burden of 32.2% and you contributed and spent the full $5,000, it works out to be a savings of about $1,610.

The Child and Dependent Care Credit

The Child and Dependent Care Credit allows a 20% to 35% credit for up to $3,000 of expenses for one dependent. The percentage of credit varies by the income of the tax filer. If your family makes over $43,000 a year, then the credit would be 20% of the expenses you incurred. If you have more than one dependent, you can claim up to $6,000 of expenses. However, you need to subtract the amount you contributed to a dependent care FSA from the amount you claim. So if you already had $5,000 in your FSA and you had more than $6,000 of eligible expenses, you can only claim $1,000 in expenses for the purpose of the tax credit. This means that the maximum credit is $600 to $1,050 if you have one dependent and $1,200 to $2,100 if you have two or more dependents. The percentage of credit varies by the income of the tax filer. Currently the 35% credit is available to families making less than $15,000 a year, and then it gradually decreases to 20% for families making more than $43,000 a year. Since the median household income of the United States is around $46,000, most families will receive a 20% credit. The full details are in IRS Publication 503 (PDF).

How to Maximize Your Savings

What is the best choice for your family? Let's assume that you are in a family with the median household income of $46,000. Here are some possible scenarios:

Scenario 1: One Dependent

If you have one dependent and spend at least $5,000 a year, then contributing to the FSA is definitely more advantageous. This is because the tax credit you would receive is only $600, but the amount you save via the FSA is at least $1,132.50 due to a federal income tax savings of 15% and a payroll tax savings of 7.65%. If you have a state tax that's waived on the contribution, then you would save more.

Scenario 2: Two or More Dependents

If you have two or more dependents and spend at least $6,000, then you should still contribute $5,000 to the FSA and claim $1,000 in expenses for the tax credit. This will yield an additional savings of $200 over the first scenario.

Scenario 3: No FSA Available

If your workplace doesn't offer the FSA, then you should take the full tax credit available to you. This is a tax credit that is often overlooked.

My conclusion is that for most families, it is best to contribute to the FSA first for your dependent care expenses. The percentage of taxes saved is usually higher than what the tax credit would give, but the tax credit does give a boost in savings to low-income families and families that spend above the FSA contribution limit. Either way, if you currently have dependent care expenses, you should definitely run the numbers and see how much you can save.

Written by Xin Lu and published on Wise Bread. Read more Taxes articles from Wise Bread.

IRS Delays Start of Tax Filing for Some Taxpayers in 2011

Xin Lu — Wed, 29 Dec 2010 13:00:10 +0000

2010 is coming to a close and soon we will be gathering our documents and filing taxes again. The IRS announced recently that a certain group of taxpayers will have to wait until middle to late February 2011 to turn in their tax returns.

This delay is due to the fact that the IRS had to reprogram their computer systems to comply with recent tax law changes passed on December 17th, 2010. This does not change the fact that the tax deadline is April 15th. However, the affected taxpayers should not expect to get proper refunds until the IRS systems are in sync with the latest laws.

The biggest group of taxpayers that should wait to file are those who itemize their deductions such as state and local taxes, mortgage interest, and charitable contributions. Additionally, this affects those who are taking the $4000 deduction for college tuition and fees and also teachers who are taking a $250 deduction for out of pocket classroom expenses. The majority of taxpayers will not be affected because they take the standard deduction, which is $11,400 for a married couple filing jointly and $5,700 for an individual in 2010.

Personally I always wait until at least February to file my taxes so this does not affect me much. If you are a taxpayer that want to take the deductions mentioned, then hopefully you are not expecting to pay for your holiday purchases with a refund check in January. Your refund will be delayed.

Will you be affected by this delay? When do you usually file your taxes?

Written by Xin Lu and published on Wise Bread. Read more Taxes articles from Wise Bread.

How Will the Obama Tax-Cut Deal Affect You?

Xin Lu — Tue, 21 Dec 2010 14:00:10 +0000

On December 17th, 2010, President Obama signed a $858-billion tax-cut package into law. Here are the important points in this package that may affect your personal finances.

Bush Tax Cuts Extended

First of all, the tax cuts put into place by President Bush in 2001 and 2003 are extended for all income levels for two years, until the end of 2012. This means that the lower tax brackets we have enjoyed for the past decade will not change very much. Capital gains and dividends will still be taxed at the current rates, so there is no need to sell all your investments at the end of this year in anticipation of higher capital gains rates. The $1,000-per-child refundable tax credit is also staying for at least two more years instead of reverting to $500 per child. Another important consequence of the Bush tax cuts is that the marriage penalty was lessened for couples where the husband and wife have similar incomes. Since Obama extended these tax cuts, this means that the marriage penalty will not increase.

Payroll Taxes Reduced

The Social Security taxes paid on wages will be reduced 2% for 2011 only. Basically, workers will pay 4.2% of their wages instead of 6.2% in 2011. The wage ceiling for Social Security taxes is $106,800, so this means that the maximum amount a person could save is $2,136. This is a good opportunity for everyone to contribute the 2% savings to a retirement account since you are given a reprieve from funding someone else's retirement.

Inheritance Tax Comes Back with a Smaller Bite

In 2010 the inheritance tax actually didn't exist due to Bush's tax package. In 2011 it is coming back, but it is much less harsh than the inheritance tax rates in the Clinton era. The Obama plan approved a 35% tax rate on estates worth over $5 million. Basically, estates under $5 million will pay no taxes, and that exempts most estates. If Obama did nothing, then the estate tax rate would have reverted back to 55% for estates over $1 million.

Alternative Minimum Tax Patched Again

The alternative minimum tax is a parallel tax system established in 1982 to guarantee that everyone pays at least some taxes, regardless of deductions. However, the problem with this tax system is that the exemption is not indexed for inflation, so if Congress does not change the law every year, more and more people are affected by the AMT. In this package, the alternative minimum tax patch is continuing into 2011, so millions of middle class families will not have to pay more taxes. The exemption is now $74,450 for married joint filers and $48,450 for single filers.

Unemployment Benefits Extended

The current levels of unemployment benefits will be intact for another 13 months. This doesn't mean that everybody is getting 13 more months of unemployment checks. What this means is that if the federal government decided not to pass this law, then unemployment benefits would stop at 26 weeks. Now that this law has passed, those who have not exhausted all their unemployment benefits will be able to collect the maximum amount of unemployment benefits allowed in their state for another 13 months. However, those who have already collected the maximum 99 weeks of benefits will not get any extension.

In summary, this package was passed so that Americans will not feel a huge change in their finances. If Congress and President Obama did nothing, then the Bush tax cuts would have expired by law and everyone would have had to pay more taxes. However, the package pretty much guarantees that taxes will have to be raised in the future because this is basically more deficit spending. It's in the spirit of "consume now and pay the consequences later," and it seems to be the American way.

What do you think? How will your finances be impacted by this law?

Written by Xin Lu and published on Wise Bread. Read more Taxes articles from Wise Bread.

5 Fun Family Friendly Games for Your Holiday Party

Xin Lu — Tue, 30 Nov 2010 14:00:06 +0000

During the holiday season most of us will attend gatherings with friends and family. If you have a big family like mine, then you know that the kids must be entertained after they finish the food. Here are five games under $20 that kids and adults can enjoy together at holiday parties.

Bananagrams

Bananagrams is a very simple and fast-paced word game that can be played by two or more players. The game comes with 144 lettered tiles and each player gets 7 to 10 letters to start with. The goal is to arrange the letters you have into words connected like a crossword. Once you use up all your letters you can yell "peel" and everyone must draw a tile. If you cannot use a letter you have, you can choose to "dump" it and draw three new tiles. Eventually all the letters are drawn and whoever uses up their letters first yells "bananas" and wins. This game is extremely portable since it is just a bunch of tiles in a bag shaped like a banana. It is great for young kids who are just learning to spell and still fun for adults who are word-game connoisseurs.

Cranium Scribblish

Cranium Scribblish can be simulated with a stack of index cards. It is the game of telephone with pictures thrown in. The first player selects or writes a phrase, and then the next player draws the phrase. The next player writes what the picture is, and so on. The results can be extremely hilarious as ideas and pictures are misinterpreted and then redrawn. One example I remember in a game we played is the phrase "Elementary, my dear Watson" turning into "Seasons of love with a dwarf."

Pit

Pit is a classic card game that has been around since 1904. The goal is to trade your cards with other players until you have a full hand of the same type of cards. Once you get a full hand of the same type you can yell "corner" to signal that you cornered the market and end the round. The trading portion is full of frenzy as players look for trading partners. This game is great for all ages since it is so simple to learn.

Apples to Apples

Apples to Apples is an extremely popular party game that can be played by large groups. We have played this with 20 people. There is a set of green cards with adjectives like "beautiful," "evil," or "chunky," and then there is a bigger set of red cards that list random things, people, and places. Each player gets a handful of red cards, and in each round a green card is drawn by a judge and every player puts a card face-down that they think matches the adjective on the green card. The judge then looks at all the red cards thrown down and picks his or her favorite. The player who put down the red card wins the green card. Some of the words and concepts in the original Apples to Apples might be unfamiliar to young kids, so there are other age-appropriate versions such as Apples to Apples Junior.

Beanboozled

Beanboozled is a wacky "game" from Jelly Belly. It is basically the equivalent of Russian Roulette for your taste buds. The premise is that there are six bad jelly bean flavors mixed in with six good flavors. The bad flavors include "skunk spray," "moldy cheese," "barf," "baby wipes," "pencil shavings," and "centipede". The weird jelly beans look exactly like the good ones, so the fun part is watching the reaction of the person tasting the bean and also tasting the beans yourself. My family played this after Thanksgiving dinner, and it was hilarious seeing people gag or sigh with relief as they chewed one bean after another.

All of these games are easy to learn and do not require a lot of setup time. They are great for some fun and laughs after a big dinner, and hopefully your holiday party will be just a bit more cheerful and exciting.

Disclosure: This post contains affiliate links.

Written by Xin Lu and published on Wise Bread. Read more Entertainment articles from Wise Bread.

Apperang: Get Paid for Trying iPhone Apps

Xin Lu — Mon, 15 Nov 2010 12:00:11 +0000

Apperang is a service that pays iPhone, iPad, and iPod touch users to try out applications from the iTunes store. I first signed up for Apperang a few months ago through an online ad, and it really sounded too good to be true. My first experience was quite disappointing because I logged in, there was nothing I could download, and therefore I couldn't get paid. So I logged out and forgot about it.

About a month later I received an email from Apperang telling me that the game Angry Birds was available and downloaders would be paid $0.25. This prompted me to log back into Apperang because Angry Birds was the most popular game in the iTunes store. Apperang then had a dozen apps that I could try, and I downloaded all the free apps I was interested in. There are also paid apps you can try, but you have to buy the app first, and then Apperang reimburses you for the cost of the app plus $0.25. (Basically, you get $0.25 for every app you try.)

This is how Apperang works:

Log into Apperang on the computer where you have your iTunes library.
Choose the app you want to download and install it from iTunes.
Sync your iPhone, iPad, or iPod touch to your computer.
Click "verify" on Apperang. Once you verify the download, your account is credited.
You can cash out to your PayPal account once you reach a balance of $1.00.

You can make this process faster if you download all the apps you want and then sync them all at once. Clicking verify on Apperang will verify all the apps you have installed and credit you for the entire amount. You have 48 hours to verify that the apps are on your device.

Why would these app developers pay you to use their apps? One big reason is that their apps rank higher in the iTunes store as more people download them. Higher visibility means that more people will organically download or buy their apps. Also, many free apps are supported by advertisements, so a bigger userbase means more income. Acquiring a long-term user for only 25 cents is a good proposition for them. Another reason is that some of these apps are meant to be trial apps and the developers hope that you will like their app enough to buy the full version. I have actually enjoyed many of the apps I tried and kept a good amount of them on the phone. I simply deleted the apps I did not like after I got paid, and there is no penalty for doing so.

Obviously, you will not earn a lot of money from Apperang, but after a month I did earn enough to buy some songs and paid apps for my iPhone. If you are constantly trying apps, then Apperang is a good way to get paid a few bucks for doing something you do anyway.

Disclosure: This post contains my referral links to Apperang. You can also refer your own friends and earn 5% of their earnings for the first two years.

Written by Xin Lu and published on Wise Bread. Read more Extra Income articles from Wise Bread.

4 Reasons Why Everyone Needs Side Income

Xin Lu — Fri, 22 Oct 2010 12:00:43 +0000

I have spoken to many friends and colleagues who have expressed that they would like to earn some side income outside of their primary jobs, but most of them do not consider extra income to be a necessity. In my opinion, side income is something everyone needs. Here are a few reasons why you should start building an income stream outside of your main job. (See also: 5 Money Making Activities You Can Do Today)

1. It's a Personal Safety Net

Your side income can be your personal safety net against unemployment. Job security is really a thing of the past, and you should be prepared to lose that income at any time. In many ways, having a good side income is better than having an emergency fund, because an emergency fund will run out, but you can build your side income further if you lose your job. If you do have an emergency fund, your side income will also make that fund last a lot longer.

2. Control Your Income

Last year I did not get a salary raise at my job due to the economy. However, I did give myself a "raise" by increasing my side income. I have practically no control over the performance of the greater economy and my employer, but I do have control over my side income. Some of my colleagues and family members actually suffered salary cuts last year, and if they created some side income then they could have made up the difference and perhaps given themselves raises, too. Adding a side income gives you greater control on your finances and helps fight against the recession's toll on your household.

3. Have More Savings

This one is a no brainer. If you can earn more income and spend the same amount, then you will be able to save more and invest more. Every little bit of extra money will bring you closer to financial independence, and everyone could use more savings and less debt.

4. Use Your Time More Productively

In the past few years, I have learned quite a bit in the process of building up my online income. At first I did not even make minimum wage for the effort I put in, but I felt productive and learned a lot. I did work that was worthwhile and interesting to me.

Most people want to have some side income but never seriously pursue it because they are too comfortable with a steady paycheck and don't have the motivation to do something extra outside of their regular jobs. Then there are others who simply do not know where to start. Here on Wise Bread there are many articles about making extra cash. For example, I have written about selling used books and writing online. The most important thing is to just start something, and maybe one day that side income will replace your full-time job entirely.

Written by Xin Lu and published on Wise Bread. Read more Extra Income articles from Wise Bread.

Why You Shouldn't Plan to Retire at Age 65

Xin Lu — Fri, 01 Oct 2010 13:00:06 +0000

Most traditional retirement advice columns I read are written as a guide to retiring in your 60s. Although the advice contained in these columns may be useful to some, I think that no one should count on retiring in their 60s — you should plan to retire earlier.

A typical retirement guide advises that you should have the equivalent of your salary saved up by age 35, and two times your salary saved up by 45. These are good goals if you plan to work until you are 65 or later, but personal issues like an illness could easily take you out of commission. Additionally, because there is really not much job security anymore, even if you wanted to keep your job for 40 years, there is no guarantee that you will be able to. It is best to save as much as you can while you have a steady income so that you can retire early if you are forced to.

For those who have a pension, it is still a good idea to save as much as you can because pension programs are being cut by many companies, and even governments, due to lack of funds. There is also no guarantee that you will be able to work until your pension is vested. I have heard of situations where employees were fired just a year or two before their pensions vested. If these people were betting on the pension and did not have personal savings, then they could no longer afford to retire.

Personally I am not planning to retire at age 65 because I just think the idea that most people have to work 45 years or more is ludicrous. I feel that these traditional retirement planning guides reinforce the idea that you must work until you are past 60, and that is just not something I plan to do. I plan to retire much earlier than that and spend more of my life as I want it.

Personal finance is personal, and you have the choice not to follow the masses. You can retire early if you want to, but it will take a mindset that is considered abnormal by the mainstream.

Written by Xin Lu and published on Wise Bread. Read more Retirement articles from Wise Bread.

Peer to Peer Lending: Prosper Marketplace or Lending Club?

Xin Lu — Wed, 22 Sep 2010 13:00:17 +0000

Peer to peer lenders allow people to lend and borrow from each other. The two largest companies in this business are Lending Club and Prosper Marketplace. I have been a customer of both for several years, and here is a quick comparison guide on which company's service you should choose if you are looking to borrow or lend money.

For Borrowers

If you are a borrower who wants the lowest rate for your loan, then Prosper Marketplace has a slight edge over Lending Club. The reason is that Prosper's credit requirements are less strict than Lending Club. The minimum credit score requirement at Prosper is 640, whereas it is 660 at Lending Club. You can also set up your loan request as an auction at Prosper. From my experience, those with decent credit profiles get lower rates at Prosper than they would at Lending Club because lenders bid down the rates of the good borrowers quite a bit.

Additionally, borrowers that could qualify as an AA rating at Prosper may only be rated a C or D at Lending Club because Lending Club's rating formula takes into account factors such as debt-to-income ratio and loan size. Even though Lending Club's fixed interest rates are lower than Prosper's for certain credit ranges, it is possible that most borrowers would be rated higher at Prosper and consequently receive a lower rate.

In addition to the interest rate, you have to consider the origination fee. Once again, the fees are lower at Prosper for most borrowers. At Prosper, the origination fee for a person with AA credit is only 0.50% with no minimum, where as at Lending Club the lowest origination fee is 2.25% for a 36-month loan. The origination fee has a $75 cap at Prosper no matter what your credit score is, but at Lending Club it could be as high as 5% of the loan. So if you have a credit rating in the lowest range of both marketplaces, then the difference in just the origination fee on a $25,000 loan could be as high as $1175. The bottom line is that Prosper is cheaper for borrowers.

However, for those borrowers with lower-amount loans and credit in the middle ranges, then Lending Club's origination fee could be a little cheaper. For example, a person with a $2000 loan request with a credit rating of A would be charged $45 at Lending Club, but he or she would be charged 3% or $60 at Prosper. However, since Prosper is more lenient on the credit assessment, it is very likely that an A borrower from Lending Club could be rated AA at Prosper and receive a 0.50% origination fee.

Although it seems that Prosper would give a borrower the lower rate, you do have to consider that Lending Club is the only one that offers 5-year loans. If you want a lower monthly payment and a longer repayment period, then Lending Club is the way to go. Also, another reason for a borrower to consider Lending Club is that almost all of Lending Club's borrowing requests are funded because they approve a smaller pool of borrowers, whereas at Prosper there are many borrowing requests that do not completely fund.

For Lenders

If you are a lender, then Lending Club is the platform for better returns. One big reason is that it seems that the screening Lending Club uses for borrowers is just much stricter. Most loan requests are rejected outright so the quality of borrowers is higher. Additionally, as I already pointed out, the fees for borrowers with lower credit is fairly high, which turns many borrowers away.

From my experience in the past three years, I have had one default at Lending Club, while at Prosper nearly half of the borrowers have defaulted. I chose the highest-rated borrowers in both marketplaces, so it would seem that the pool at Lending Club is just better. Lending Club also has a very good collection process that starts as soon as the loan goes late, and you are updated on the collection process. I have had a couple late loans that were actually cured by Lending Club, whereas at Prosper there is very little transparency to how they collect on late loans.

Additionally, Lending Club has an IRA program where you can let your investments grow tax free. This is great for those who are looking to invest long term because the interest paid from peer to peer loans are usually taxed at your highest marginal tax rate if it isn't tax sheltered. Lending Club also offers bonuses from time to time for doing various tasks, such as setting up recurring deposits.

Personally, I am lending at Lending Club exclusively now because the default rate has been quite low and the returns has been consistent. I have had one loan default after two-and-a-half years and the overall return is around 9%. I have been monitoring my loans once every week and selling off the loans that show drastic changes in the borrower's credit score. I usually sell those loans at a slight discount of 0.5 to 1% and they usually sell within a day, so I would say that the liquidity is fairly good. Prosper also has a note trading system, but it seems that the notes I put up for sale are just not moving as fast because they have already defaulted.

Although I am no longer adding more money to Prosper, I have to say that if you have a high tolerance for risk then there are loans at Prosper that offer better rates than at Lending Club. I do have a few performing loans at Prosper that are paying 30%, and that is a rate not reachable at Lending Club.

The bottom line is that these peer to peer lending marketplaces do facilitate money lending between people, but you as a consumer should always research which option is the best for you. If you are looking for a personal loan of $25,000 or less and have a credit score of at least 640, then it doesn't hurt to check out these peer to peer lending companies. The loans are much cheaper than getting a payday loan and I think the fees are very reasonable. If you are an investor looking for a better return on your idle cash, then Lending Club might be the better choice for getting your feet wet. After three years, I think that the peer to peer lending industry has improved quite a bit, and I hope that it is here to stay because it is a good alternative to many other loan options.

Disclosure: This post contains affiliate links to Prosper and Lending Club.

Written by Xin Lu and published on Wise Bread. Read more Entrepreneurship articles from Wise Bread.