P2P lending is definitely one of these online innovations that’s going to change the game in lending. Companies like Lending Club have created a solid lending platform that really puts old banking and lending institutions to shame. The idea that people could actually replace a big bank in the future is just an incredible concept to me.
Even though the P2P industry is just in its infant stages, it still presents a solid opportunity for someone who wants to diversify their portfolio and make some passive income to boot.
How Much Do I Have in My Account Now?
It’s honestly been a few months since I’ve touched my Lending Club account but I keep getting notices in the mail about how I’ve got a small stack of cash sitting idle in my account (this is a big no-no as I’ll explain later, oops).
As of right now my account is just shy of $1,000. I’ve got no defaults and I’m invested in 35+ loans at the moment. Knock on wood, but I’ll probably end up getting my first default after I post this lol. If you watch the video I made above I give some specifics.
How Does Peer-to-Peer Lending Work?
If you haven’t heard of Lending Club before it’s a peer-to-peer lending platform where people can take the role of lender (if you’re looking for an interest return off your money lent) or borrower (if you’ve got a decent credit score and you’re looking for small loans of $25,000 or less). If you want to be a lender you can start off with as little as $25 to get started in lending. It doesn’t take much and in fact I lend only the minimum of $25 into each loan just to diversify and spread my risk.
I did a lot of research before jumping head first and Lending Club seemed to be the best choice for me. First and foremost, what I was looking for in a platform is security. They’ve got some fairly strict guidelines they follow when it comes to qualifying borrowers and 90% of applications get rejected immediately. This is a far cry from the old days of Prosper when anyone and everyone could get a loan (it was called the e-bay for loans) and because of this the default rates over time just went through the roof.
The basics behind P2P lending from a lenders perspective.
Lending Club also goes after borrowers that don’t pay. It’s basically like defaulting on a loan from a brick and mortar bank – they’re going to call you, send collections, and do the dirty on your credit report. No ifs and or buts about it, this is serious business.
Why Become a Money Lender?
The reasons are many. The interest. The security.
If you’ve got a large chunk of cash just sitting in your savings that you won’t be doing anything with for a few years, consider dropping a portion of it into Lending Club and earn a decent amount of interest off of your investment.
You’re the Bank, Bro
Besides being a mafia loanshark, there really is no other way for the average joe to actually loan out money and get it back.
There is no collateral on these loans and the interest rates represent that. I usually lend to B grade borrowers with a 750+ credit score and a solid 10% interest.
Build a Nest Egg for the Self-Employed
Earning online can create a real dilemma for some people. There’s no such thing as retiring from a nice firm and collecting a pension every month. You have to make your own retirement and Lending Club is appealing to me because of this. There’s no getting rich quick, this is strictly a long-term strategy and it should be handled as such. Security first, interest second.
I will get more into the specifics of loan-picking in just a minute.
Why Borrow?
Although I’m more intrigued with lending, it wouldn’t be right if I didn’t mention the advantages from a borrowing perspective.
Of course the biggest advantage for borrowers is the interest rate, it’s much lower compared to credit cards which can be 20% interest and above depending on your credit.
It’s also an easier way to get a small loan. While you’ll still have to write out your financials and the reason why behind your loan application, you won’t have to go meet a banker and have the fate of your loan in the hands of one person.
How To Pick Loans the Smart Way
How you pick your loans depends totally on your goals and your tolerance for risk/reward.
Me personally, I’ll take a little bit of risk to get around a 10% return but I won’t go too far down. I just don’t want the defaults.
I would advise you to stay away from the low grade loans, too. Even though their high interest rates look promising, the defaults are going to bring your overall returns down.
I like to stick to B grade loans. They aren’t as safe as A grade loans with their lackluster 7.50% return that probably barely peeps over the real rate of inflation, but they still contain a lot of high quality borrowers. Many B grade borrowers are 750+ FICO, have been at their jobs for years, making a solid income, etc… I honestly don’t know why some of these borrowers are B, but whatever I’ll invest in them if they look good and take the 10%.
Stay Away from Loan Applications Like These
The Luxury Item
I don’t invest in any loans that have to do with buying or maintaining any luxury items. I saw one application today from someone that wants to pay off his boat that costs $1,000 a month to maintain. He’s using 50% of his revolving credit balance of $10,000 and has been at his job for less than a year. His gross income is $6,600 a month. The kicker is that after he’s all done paying off his boat he wants to donate it to charity to get rid of it.
The Debt Consolidation Loan That Doesn’t Quite Add Up
Sometimes you’ll see loans for people who want to consolidate their debt but ask for thousands beyond what their actual debt adds up to. I am looking at a loan right now where his total disclosed debt is $19,000 and this person is looking for a full $10,000 beyond that. Trying to escape debt by putting yourself under more doesn’t make for a sound financial tactic to me, I would pass on this one too.
Even though these people may very well end up paying off this loan, you really have to look at the scales and invest wisely.
Positive Signals to Look For
I like home improvement, business loans, and students (some) consolidating their student debt. If someone is looking to increase the value of their house, consolidate their student loans after starting their career, or start a new venture (especially WHILE they are holding a job, gotta love the hustlers) then I think these people are worth lending to. Any loans where the borrower is trying to increase their income are *usually* worthy of lending to.
Job length is big for me. If they haven’t been at their job for at least a year, filter them out unless maybe they just coming out of school and entered into a new career like I mentioned above.
Some people like to filter out renters vs owners. I know this is a good signal but I don’t pay too much attention to it. I am more interested in a potential borrowers FICO score (keep it around 720+) and their debt to income. If someone is already slammed with debt or their using a ton of their credit I will pass on them.
Examples of Loans that Are Probably Lend-Worthy
Backing A Landlord For More Income:
I intend to use the loan proceeds to undertake some repairs and improvements in a second home that I co-own with the goal of raising the asking rent.
Backing A Real Estate Investor:
I bought a FHA forclosed home in 2007. It was completely gutted and empty. Over the last four years, I have been making improvements and slowly bringing this wonderful house along. With all of the new technology and manufacturing of products and the home improvement credits that go along with them make this a great time to do such an overhaul.
A Debt Consolidation Loan That Actually Makes Sense:
Actual personal goal is to be debt free end of 2011 related to credit cards, will still have normal mortage and have already paid off my car loan. I currently maintain 10k free cah flow for any emergencies and 13,500 line of credit with zero balance along with over 6k open on overdraft protection.
I didn’t include any financials on any of these due to privacy reasons but hopefully these good examples fine tune your loan picking senses.
A Worthy Read For Budding Money Lenders
Most of how I pick loans I didn’t learn from researching lenders online, it’s actually inspired by the oldschool financial advice book Richest Man in Babylon. First published in 1926 it’s still a good read to this day. There is a section in the book about the gold lender that is worth the read if you want to get your feet wet with something like this. Here’s a link to the free PDF version of the book.
I Love Compound Interest: Keep Your Money Working For You
Make sure when any amount above $25 enters your account immediately lend it out.
Compound interest is your best friend! Don’t be like me and have a couple hundred sitting in there not doing anything when it could be working for you.
A Charitable Alternative For Social Entrepreneurs: Kiva
If you don’t like the idea of lending for profit then consider lending non-profit. Kiva is a cool program where you lend to entrepreneurs all over the world. They aren’t charged any interest but the repayment rate is around 99%. Out of 30 loans over the years I’ve had 2 go bad. The money was refunded to me however (I don’t know how they can afford that), so I didn’t lose anything.
Post your questions or comments and if you have a P2P account anywhere I’d be interested in hearing how you’re doing.
UPDATE: January 22, 2012
My account total is 43 notes issued and current, 8 fully paid, 1 note late 16-30 days, and one note late 31-120 days.
My only C rated loan (go figure) went into default, I only recovered about $4 in principle and interest the rest of the $20.90 is in default. 99% of the time I never invest in C and below loans. I actually have an F loan earning 18% interest and a D rated loan earning 15% interest that are current, but we’ll see how long they go and if they end up paying off the loan in full.
I had a B rated loan that is currently about 2 months late, they paid more than half of the loan off though and outstanding principle is @ $10.83.
As of writing this my Net Annualized Return sits at 10.31%.
Have you ever had a loan you wish you could snatch back? I funded a loan that was issued, but after I funded it and before it was issued, the BORROWER left this snippy reply to a question:
“None of your business why I have revolving credit. As long as I pay my bills…”
Another one I wish I could take back:
“See this as helping the little person, instead of a risk venture.”
Um, nope, it’s definitely a risk venture; one upon which I intend to make money. It is not my purpose to help the “little” person….I am one of those myself, and helping myself is what I am trying to do!
I have a regular account and a Roth IRA account. I immediately invest any money coming back to me in my regular account, but haven’t yet invested all my Roth IRA money. I figure on funding a few loans per day; that way I can see what new loan applications are coming in, and be pickier on what I choose. That said, I tend to look at the C-D loans, rather than the A-B loans. I also tend to leave the small business loans alone, because 90+% of all small businesses go under in the first few years.
It will be an interesting adventure. Subscribing!
I don’t think there is a way to uninvest once you invested but I understand that there’s a note selling platform where you can resell the note to other lenders if you want to get out of it. I have never played with this, however.
I think that was another big fault of Prosper when it first came out. A lot of borrowers were playing to the emotions of lenders with their application (and I saw that many lenders were lending based on emotions) when really lending has no place for pulling heart strings. Either you use something like Lending Club and lend on the loans which you think have the best chance or return without default or you invest to make a difference and use something like the Kiva platform. Mixing the two is a no-no.
Funding a few loans per day is way more than I’m doing. I’m using the automatic deposit and cherry pick about 5 per month. You have a lot of guts if you’re doing C and D loans, I personally wouldn’t touch them but it really depends on your risk tolerance.
Any news on your Lending Club experience? No defaults yet?
So far 39 issued and current, 6 fully paid. No defaults yet.
Lending club is no different than a traditional bank. Even worse! I applied for a loan and my loan request was posted the next day for investors to fund. But all of a sudden it was removed when 75% of the loan was already funded and when I was all excited. It was very insulting. I got an email from lending club with all their stupid formula reason of why I could not be funded. My credit score was 708.
I have never tried to apply for a loan through them so I can’t offer any perspective as a borrower. From what I understand they are quite strict, though.
I had the same experience. Their customer service is one of the worst I have ever encountered. They may protect their investors’ money but they do it by skimping on their customer. I had a 700+ score but was denied because I was self-employed (I think… I was tired of holding and writing letters to get an answer that would never come.) I was asking for a credit card consolidation loan which would reduce my debt exposure considerably but their underwriters must not be smarter than a 5th grader when it comes to calculating debt ratios. They put me through the ringer and make you think you’re all but approved until the last second when you’re actually not and then to nobody’s surprise, they wont talk to you anymore.
I would stay away unless you’re really desperate. This is not a customer oriented company and clearly, profits and their investors are priority one.
That’s interesting that you were denied when you’ve got a 700+ FICO.
I believe if the full value of the loan is not funded by the individual investors within the 14 day waiting period, the loan is denied. It’s nothing personal, even if you have a perfect credit score your loan application may be denied based on lack of funding.
I am suspicious about using these loans to “consolidate” student loan debt. Student loans typically have much lower interest rates but can not be discharged in bankruptcy. If you were planning on filing bankruptcy, it would make financial sense (but not ethical) to pay off the student loans with one of these high-interest loans and then have it discharged.
That’s a good point that I never considered. These days I generally don’t lend on debt consolidation loans, but there’s a lot of them on there. Everyone’s in debt.
I am interested in lending through Lending Club. I’m wondering how risky is it, how much would you invest, and have you had to deal with any defaults?
I wrote an update for you at the bottom of the post.
Hi andrew,
Great info, thanks for sharing. My husband and me are considering this highly. After watching your video I just wanted to know what happens if those loans you nest in do not get enough lenders or do not go through, joe long does it take before you are informed of the decisions and do you immediately get a refund? Also, I know someone who was invited to apply based on getting a letter from lending club, should they consider especially since lending club contacted them?
To all those complaining about being denied, you have to understand that there are two main criteria when considering a loan. I work in the financial industry, and we turn down loans all of the time, even with high credit scores. A credit score shows one thing, intent to pay. Your credit score shows me that you have always paid things on time, with no default, and so on. However, there is an even bigger consideration, your ability to pay. If your income can’t be verified, or your monthly obligations would increase to more than 50% of your income by funding this lone, then we seriously question your ability to pay. You may very well have the ability and intent to pay, but it’s all a risk factor if it can’t be verified. On the borrowers side, lending club may seem a bit “worse than the banks” but that is simply because of how selective they are.
On the picking notes, I wouldn’t write off debt consolidation. Just because someone has credit card debt does not mean they have credit trouble, look at some of the a notes for debt consolidation. Debt consolidation for an a note is perfect, they have been making regular payments, with higher interest and higher minimums. If you fund a loan, they will erase those debts and have only you left to pay, a lower rate, and smaller payments. If they have been paying their higher rate and higher payments all along, what makes you think they won’t be able to pay smaller payments at a lower rate?
My personal method for picking notes is to look at verified income, debt to income ration (if it’s above 30% I don’t want it) and then to look at how long they have lived there, and worked there. If those things look good, then I choose mostly a, b, and c, loans. Since this is long term (40+ years until I retire) I choose mostly 60 month loans, I get less in each payment, but I get more in the long run, and I know my borrower has smaller payments, easier to make when tightening the belt. about 10% of my notes range in the d and e notes, and about 5% in the higher interest notes. Just be sure to diversify, if someone defaults halfway through a loan, and you invested 200 in that, then you have earned roughly $10 in interest and lost $100 in principal, however if you only invest 25, then you’ve gained $1.25 in interest and lost 12.50 in principal, a much smaller loss that will be made up by your other notes (All math calculated simply, not actually accurate)
Just my few comments, good lending everyone!
Hey Thomas considering your financial background I think your take on this is a lot better than mine. I’m going to relook those debt consolidation loans after reading this, you’ve got a good point there.
Also loans are not denied if not fully funded, the borrower will have the choice to take it or leave it.
Also as I just saw the update at the end, that net annualized return that lending club shows you is considering your defaulted loan, so you are still doing well with your above 10%.
I opened an account with Lending Club 3 years ago with $5K. Today my account balance is $5,975. That beats the crap out of any, ANY, bank account, cd, bond, and mutual fund over the past 10 years! I have had some defaults and it turns out that the majority of them are in the A-B highest quality loans!!! Strange. I started moving more into the C-D grade loans and am actually having fewer defaults (but it is still a little early to judge). If you review the current statistics on their site, it shows that almost 50% of the investors are earning over 9% (net after expenses and defaults)!!!
You may not be able to see those statistics if you are not an investor actually. Another reason to sign up. They have really great statistics and a fantastic web site for managing your account. I am obviously very happy with them and only wish I had invested more $$$ 3 years ago.
That’s quite a case study right there, thanks for sharing. I think we’re earning relatively the same net interest rate. That’s interesting that the majority of your defaults is in A-B. I have 2 late loans so far (no defaults). 1 of them is one of my only lowest grade loans (a C) and another is a B (which is the grade the majority of my loans are made in). Hopefully these won’t turn into defaults, I’ve got my fingers crossed. But I know that the reality is that they will.
One of the loans however is already half paid off so its not too much of a loss, the other about a quarter paid.
But I know defaults is just part of the game, especially if you’re going to be dipping into C-D grade loans. Good luck on that though, check back sometime and let me know how it goes? I’m pretty interested in the high risk investing because I know that the rewards can be better if done correctly. A big if, I’m guessing.