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Bank account changes may not pay

Keeping money outside of a bank is becoming more popular. The FDIC conducted a survey of American households that indicated that close to 30 million households are now using alternatives to banks. Money orders, checking cashing services and payday loans are just a few of the costly options households are utilizing.


The FDIC plans to address the large number of un-banked and under-banked households in 2011, but meanwhile even more alternatives to traditional banking are tempting savers. These new options may sound exciting, but they have their pitfalls.


Peer to peer lending


Social lending, also called P2P lending, refers to the platform where lenders and borrowers can formalize loans online. By taking out the middle man, borrowers can find good rates on their small personal loans. Sites likes Prosper, Lending Club and Loanio have processed millions of dollars in loans that have been funded by investors willing to give the online marketplace a try.


It sounds like a good idea with potential winners on both sides, but the problem arises when the lines between investing safely and lending with risk are blurred. Many of the social lending sites offer direct comparisons of their average lender returns to the rates paid by banks on CDs, money market accounts, savings accounts and checking accounts. This is misleading because returns for P2P lending can be wildly variable and are not guaranteed, while investing in a bank deposit product offers FDIC insurance protection.


Social lending sites have now captured the attention of regulators. State securities authorities and the National American Securities Administration Association Inc. have issued warnings to advisers and investors about the costly risks of  peer-to-peer lending on the internet for both borrowers and lenders.


Preloaded cards


Prepaid cards give consumers the ability to load a card with real value (cash) and avoid the pitfalls of overspending or paying the high interest rates and fees associated with credit cards. A preloaded card can also help you stay within your budget or might make an appropriate gift for a college student or recent graduate. The cards have become very popular. A Mercator Advisory Group report found that $36.6 billion in funds were pre-loaded  on cards last year. Their research concludes that number will grow to  $118.5 billion in 2012.


Despite the impressive growth, prepaid cards don't make sense for everyone. The biggest objection to the cards to date has been the high fees charged for normal usage. The popular Green Dot card for instance charges $4.95 for initial purchase and $5.95 a month for any month cardholders do not load $1,000 to their card or make 30 purchases. Another card was pulled before ever hitting the market. The Kim Kardashain Kard was proposing fees as high as $60 to $100 just to activate, according to Business Insider.


Savers lose out on earning interest if they use a prepaid card instead of keeping money in a bank. If you can trust yourself not to overspend, your money is much better off in an interest-bearing account.


Money market mutual funds


A very safe place to park cash has always been the safe mutual fund money markets offered by fund companies like Fidelity, Vanguard and Dreyfus. Money market funds as they are called, can almost act as a replacement for a bank account by offering investors check writing privileges and the ability to transfer funds online. However, there are some important differences that make mutual fund money market an inadequate replacement for a checking account or money market account at a bank.


The most obvious difference is that the highest bank money market accounts offer rates over ten times more than the paltry yields earned right now on money funds. Investors can lose out on significant investment income by parking money in money funds, instead of bank accounts.


A second difference is fees. Bank account fees are pretty simple. Usually you can even avoid paying any monthly fees. Money funds are a different story. The fees and the expense associated with running your fund are deducted automatically from the performance return of the fund. The fees are usually small, but you are still paying extra money for keeping money outside of a bank.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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