Note: This post was originally written on March 29, 2011, and has been updated to reflect policy changes at Lending Club. However, I've kept the stats and my results the same as in my original post. Since this post was first written, I have made many more loans on their platform and will continue to do so.
I have been investing a little money on Lending Club.com and my results have been pretty good so I just wanted to share my results and my strategy for investing in notes.
If you have never heard of Lending Club before, they are a peer-to-peer (P2P) personal loans website.
That simply means that you lend or borrow directly from other people via the Lending Club website and cut out the bank in the middle.
For people with money to lend, that means they can get higher interest rate than they get with a bank savings account or in a CD (Certificate of Depression).
For people looking to borrow money, this means they can get a lower interest rate and may even be able to get loans when a bank would turn them down.
From here on out, I'm going to share with you my experiences as a person lending money because that is all I have done on this site.
The Good
Of course the best thing about this site is the higher interest rate. As of this writing, here is a screenshot of my net annualized return:
Individual results will vary but that is much, much better than what I would get at a bank for a savings account.
I am being a little more conservative, but I am shooting for a return between 8-10% per year.
Of course there is a trade off of risk to reward which will be mentioned in the next section.
The minimum investment in each note is very small, only $25 per note. Therefore, even if someone is borrowing a total of $25,000, your exposure to that note can be as little as $25.
You can choose to invest more in that note if you want, but it is nice to know that you have the option to diversify to minimize the risk of default.
Another good thing about investing money on Lending Club is that they website is easy to use and you can pull money from your bank account easily via ACH.
There is also an area of the site where you can trade notes. I have not used this part of the site yet, but I will get into that later when I have more money.
This secondary market provides liquidity in case you want to cash your note out.
Trading notes requires a little ‘bond math' but once you figure it out, it's pretty easy.
The last benefit is that you can ask the prospective borrower questions about their financial situation. This may help explain unusual items on their credit report or application.
The Bad
There is more risk associated with these loans compared to a savings account at the bank, that is all there is to it. Just like with any other investment, higher returns means higher risk.
The borrower can stop paying. A bank takes on that same risk when they give you a loan.
Since these loans are unsecured (not backed by an asset), you could lose most or all of your money if the borrower decides to stop paying. Click here to read more about the risks.
This may sound scary, but in the next section I will show you how to minimize that risk.
Also, you are investing in a note with a 3 or 5 year term, so your money will be locked up for that period of time.
Like I mentioned above, you can sell your note on the secondary trading market but it will usually have to be at a discount.
My Strategy
So this is the strategy that I use to invest in notes on Lending Club. Everything in my Disclaimer for Forex applies to note investing.
This strategy is provided for informational purposes only and is just my opinion.
What I look for in the notes that I buy (in order of importance):
- Credit score of the borrower– According to what I read on the Lending Club website, the biggest indication of if a borrower will repay is their credit score. All thing being equal, I look at the credit score of the borrower.
- Debt-to-Income Ratio (DTI) – This is the ratio of the amount that the borrower is paying on their existing debt to their income. I like to see this as low as possible, 20% or lower.
- % of Credit Used – I like to see that the borrower has used only a small portion of their available credit lines. The lower the better.
- Amount they want to borrow – I like smaller total loan sizes because their payments are lower and will be easier for the borrower to pay off.
- Reason for loan – I like people who are doing home improvement or consolidating debt. I stay away from vacations, cars and doodads. Home improvement loans will usually add value to their home and getting rid of debt is always a good thing.
- Length of employment – Can the borrower keep a job? Obviously, they may have changed jobs recently, but it is important that they have shown a record of employment.
- Rent or own – I like to see longer term home owners because generally if they were responsible enough to buy a home, they will probably be more responsible with this loan.
- Approved or under review – This is minor, but I only like to invest in loans that have already been approved. I tried to invest in a couple of loans in the past that were under review and the loan eventually got rejected and I had to find another note to invest my money in. Waste of time…make sure the loan you like is good to go.
From there, then I look for the notes in the target rate I am looking for.
At the time of this writing, Grade B (by LendingClub standards) notes are the safest notes in the target interest rate that I am looking for.
Therefore, I primarily invest in that grade of notes. I throw in a Grade C note if I need to raise my return to my target.
If my return is pretty high, I will purchase a Grade A note to create more stability in the portfolio.
Stay Away From…
If there is one thing I would recommend you stay away from, it is the “auto invest” feature.
This is something that LendingClub has that makes it easy by choosing the notes for you based on your target interest rate.
The trouble is that you don't know what notes you are getting into.
One of my friends used this feature and chose the highest interest rate option and ended up with a couple of loans that defaulted.
So my recommendation would be to hand pick your notes yourself. Stay in control of your money as much as possible.
My Results
My percentage returns are listed at the top but of the 10 notes that I have invested in, 8 are current and 2 were paid off early.
I don't know what the typical results are, but click here to see the overall stats from the Lending Club website.
At this point, I am rolling the money I make into buying more notes. At some point, I will start taking money out, but not anytime soon.
So that's it!
If you are looking for a way to park some money outside of your trading account and get higher than bank rates, then LendingClub.com may be a good alternative for you.
Yes, this takes time to get going. If you are looking for some faster ways to build a new account, read this post.
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