Want to earn 5% on your money? There’s an opportunity out there, but it comes with some hazard.
What you need to know about StreetShares
A reader named Philip wrote in to Ask Clark with the following question:
“We just saw an advertisement for “StreetShares,” which as I understand is a CD or a bond. The money is used to fund veterans who want to start businesses. When you buy [this] CD, you have to hold it for 3 years and it pays 5%. You can guess my question — Is this legit or is it a scam?”
Thanks for the question, Philip!
First, let’s take a step back: What exactly are Street Shares? StreetShares.com is a veteran-founded website that offers lines of credit to all kinds of Main Street small businesses, with a special emphasis on those that are owned by fellow veterans.
But for the average user, StreetShares has a different kind of appeal: It promises you can earn 5% interest on your money by making micro-loans starting as low as $25 to veteran-owned businesses on three-year terms.
Five percent interest is a pretty high number — especially when you consider that even the best online banks are only paying somewhere in the neighborhood of 2% interest on your money at this time.
Well, how does StreetShares do it?
When you dig into the latest regulatory filing they’ve linked near the bottom of their website, you’ll find the words “promissory note” sprinkled throughout. A promissory note is a basically a written IOU promise to pay someone money.
“You never want to be involved with a promissory note,” money expert Clark Howard says. “It’s like somebody saying to you, ‘Hey, give me your money. I’ll pay you 5% — I promise.'”
Now, this is important: We’re not saying StreetShares won’t be able to pay the 5% interest on your money, particularly in better economic climates.
It’s just that, by the company’s own admission, this is a non-deposit investment product that is not FDIC insured, comes with no guarantees and can lose value.
So if this opportunity interests you, Clark recommends you make sure it passes the sleep test. That is, only put in as much money as you’d be able to sleep comfortably at night knowing you could lose.
One more thing we should note: If you do get involved with StreetShares and later need to withdraw you’re money, you’ll have to pay a 1% junk fee during the first year after opening your account to get your funds. However, StreetShares does note that, “On every anniversary of your investment we give you a two-week window when you can withdraw penalty-free.”
Yet if capital preservation with some growth is your thing, you may be better suited looking at a certificate of deposit from a bank or credit union.
Or check out the No-Penalty CD from Marcus by Goldman Sachs. You earn a guaranteed 2.15% with a minimum $500 deposit and the CD matures in just 13 months. And get this: There’s zero early withdrawal penalty and it’s FDIC insured!
So be sure you consider every facet of what’s important to you before making a decision about your money.