Do the words “Stock Market” make you cringe? Did you see your 401k get slashed into a 201k? Are your bank CD’s paying pennies on the dollars? Are you interested in potentially making 9.65% on your money? If you answered “Yes” to any of these questions, then it might be time to invest into something different. Peer to Peer Lending might must just be what the doctor ordered. This post shares my experience on setting up an account with P2P leading lender Lending Club and how I made my first investment with them. Don’t know what Peer to Peer lending or Lending Club is? Don’t worry, you soon will.
Be sure to take advantage of a free $25 offer by clicking on the various Lending Club Links throughout this article.
What is Peer to Peer Lending?
I’ll be honest, I had read a few blog posts on Lending Club and follow their Twitter profile, but I really didn’t understand what they did or what Peer to Peer Lending was. Thankfully, after requesting some info from them, a representative reached out to me with a phone call. How’s that for awesome customer service? Here’s how it works:
Peer to Peer lending sites like Lending Club and Prosper bring together a large network of borrowers and investors. First, a borrower who may be looking to consolidate debt with one lender and lower their interest rate would go to Lending Club’s site and fill out an online application. Based on several criteria (credit score, debt-to-income ratio, size of loan) that person is given a rating which then gives them a determined interest rate. Their information is now on the Lending Club site for potential investors to loan them the money and collect the interest. Much like investing into a bond.
Although it has it’s similarities to a bond, there is some potential downside. The biggest downside is that the borrower may default on that loan which leaves you out in the cold. That has to be an important consideration when you are choosing the loans you want to fund. Riskier and a potentially higher return is not always the best answer. One last thing to note is that Lending Club is not approved in all states.
Investing With Lending Club
How to invest money with Lending Club. Since I don’t have any debt to pay off, my main interest in Lending Club was as an investor. The cool thing with investing with Lending Club is that it only takes as little as $25 with one borrower. With a $250 investment you’ll be able to diversify among 10 different borrowers- much like a diversified mutual fund. You have the option of selecting the more conservative loans or going more aggressive.
Opening an Account With Lending Club is Easy
I was amazed on how simple it was to open an account with Lending Club. After providing basic information as you would to open a savings account at your local bank, you are ready to go make your first investment.
After you verify your account, you have to fund it. You have the option of adding money from your checking account, wiring the money, transfer using PayPal, credit cards, or now you can even transfer in an existing IRA. For my first test, I transferred $250 from my PayPal account. It only took 15 minutes for the money to transfer in before I was ready to invest.
Making My First Investment With Lending Club
Once the money is showing in your Lending Club account, you’ll see a screen like that above that is asking you to “Build a Portfolio”. As you can see, a conservative portfolio will get you a approximately 10.62% (provided no defaults) while the aggressive portfolio is 16.74%. Having been the first time I had done this, I opted to go for the more conservative portfolio.
Once I selected the Conservative Portfolio, the Lending Club system automatically prepared a diversified portfolio of 10 individual notes which would net me an approximate 8.49% return (after potential default rates and service charges). Still not a bad return on my money. If there are no defaults and no pre-pays, I stand to make 9.92% return.
Since I selected the Conservative Portfolio, most of my notes were in the A, B, C categories (least risky) with one loan a D. I could have changed it, but opted to go a little risky for at least one of my investments.
Information on Borrowers
While I took the easy approach and let Lending Club compose the portfolio for me, you also have the option of building your own portfolio of borrowers. They give you the ability to get as much information on the potential borrower and even ask the borrower questions if you need further clarification.
One of the borrowers that I helped fund was looking to expand his current computer business. This was an excerpt of what he was looking to accomplish with the loan.
I am requesting this loan with the goal of expanding a computer repair, computer networking and website development business that I currently own. I am an excellent candidate for this loan as I currently have no debt and simply need additional working capital in order to take advantage of the rapidly expanding IT market.
If I wanted to ask him more questions, I could have; but didn’t see it necessary. In addition to the purpose of the money, you also have access to the following:
- Gross Income
- Current Employer
- Home Ownership
- Length of Employment
- Credit Score Range
- Accounts Now Delinquent
- Earliest Credit Line
- Delinquent Amount
- Open Credit Lines
- Delinquencies (last 2 yrs)
- Total Credit Lines
- Months Since Last Delinquency
- Revolving Credit Balance
- Public Records on File
- Revolving Line Utilization
- Months Since Last Record
- Inquiries in Last 6 Months
As you can see, you are provided with more than enough information to make an informed decision about your future investment.
Lending Club FAQ’s
Just in case I missed anything, here’s some more of the common frequently asked questions from the Lending Club site itself:
What is the minimum investment amount to open my account?
There is a minimum investment of $25 required to open an investing account. Diversification across multiple Notes requires a larger investment amount. For example, an investment of $5,000 would let you diversify across as many as 200 Notes. PRIME and No-fee IRA accounts do have minimum opening balance requirements of $5,000 and $10,000 respectively.
What to expect when a loan is late?
Lending Club will make every effort to contact the borrower and bring the loan back to a current status. Our company implements the industry’s most effective mechanism to ensure the loan status do not deteriorate further. You will be updated with any collection activity via the loan performance page in your account. Be aware that defaults are a natural component of investing in notes, and diversification is the best resource to lower the volatility of your portfolio and obtain consistent returns. Most investors start with an investment of $5,000 which allows for investing in as many as 200 notes. The average net annualized return after defaults and fees since inception is over 9.5%.
How are loans listed and approved for investing?
Borrowers who apply and meet our strict credit policy are listed on the site within 24 hours to receive funding. An additional manual review is performed and in some cases, Lending Club requires additional information. When all information is complete loans are marked “Approved”. All approved loans will issue if the borrower receives funding and bank account is verified.
What is the default rate on Lending Club loans?
The overall annualized default rate since our inception in 2007 has been below 3%. Our stated returns to investors is measured after taking into account that default rate. Our default rate remains low because we are very diligent in both our selection criteria and our collection activities. Since inception, we have been approving less than 1 in 10 loan requests submitted to Lending Club. You can monitor the defaults and delinquencies of loans funded through Lending Club by reading our SEC filings at www.sec.gov and on our Statistics page.
Borrowing Money With Lending Club
As I mentioned, Lending Club to me was more of an investment opportunity not for borrowing. If you are looking to borrow and possibly consolidate some debt or fund a business venture, Lending Club will fund you up to $25,000. This can be especially attractive if you’re having issues getting funds from a bank or credit card.
If you’re looking for a good story for someone who did borrow from Lending Club, I encourage you to read a good story by Matt Jabs from Debt Free Adventure. He walks you through the steps he took to consolidate his high interest credit cards and consolidate them with a loan from Lending Club.
Need to borrow some money or consolidate debt? Click the Sign Up Button to find out more info on Lending Club.
Is Lending Club Too Risky?
Although my experience is short lived, I don’t see Lending Club being any more risky that choosing a stock mutual fund. The key is to be diversified-which is like any other investment you would make. Do your homework and see if Lending Club makes sense in your investment portfolio. As of now, it makes sense in mine.
Want to try out Lending Club? Just click above and get $25 towards your first investment today.
Other Reviews on Lending Club
- Bible Money Matters has a nice Introduction on Lending Club and Peer to Peer Lending.
- Cash Money Life offers his take on Lending Club.