The Personal Finance Playbook

I funded my Lending Club account before Lending Club had been approved in Missouri.  As much as anything else, I was excited by the idea.  Instead of putting that portion of my money in the bank, and allowing the bank to lend my money at a profit, while handing me back a paltry return, I could leave the bank out of the equation and lend the money directly (almost directly) to the borrower and in turn earn a much better return on my money.

This approach, of course, carries with it substantially more risk than putting your extra cash into an FDIC insured bank account.  That’s where your greater return comes from.  The greater return, I should mention, is theoretical.  Taking more risks leads to higher returns, except when it doesn’t.  With any peer to peer lending site (Lending Club, Prosper), you have to be able to sift through what’s out there and determine how you want to allocate your risk.  You have most of the same information that a bank would have at its disposal in making your decision as to whether to lend.  Because you’re only providing a small portion of the funding for a particular loan ($25 increments), you probably won’t spend the kind of time the bank would.

Here’s what I look for:

I start with Lending Club’s ranking.  Whether they’ve made it A1-5, C1-5, whatever.  This is important because this is directly tied to your return.  The safest loans offer the lowest risk of default, but also the lowest returns.  Theoretically, if you can make your portfolio diverse enough the higher returns of the riskier loans will pay off.

Then I go to the credit score, income, debt-to-income ratio, etc. (all the basic stuff).  But you know all this stuff.  Another thing I consider is whether they’re a homeowner with a mortgage.  If they look like they have the ability to repay, it’s difficult to get away with a default if you have a discernible asset that a judgment lien could attach to.

With all that in mind, I thought I’d let you know where I’m at.  I have an experimental amount invested (about $1000).  It took some time to invest the money.  There weren’t always loans I was interested in or that met my requisite margin of safety.  Now that all the money has been invested for a couple months, though, I’m basically on cruise control.  I simply have to find a loan I want to invest in every month and a half or so (when the payments of principal and interest reach $25).

Thus far, I’ve been lucky.  All my loans are current and I’m earning (according to the stats kept by Lending Club) a tidy 9.92% return.  Of course, it’s very early in the process.  A single default could potentially wipe out a considerable amount of that return.  Since I focused most of my investment in the very safest (“A”) loans, though, hopefully my defaults will be minimal.  I hope your experiences with peer to peer lending (if you’re trying it, are going well).  Thanks for reading.

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asset, borrower, consumer, debt, FDIC, interest rate, investing, lending, lending club, lien, loan, notes, peer, peer to peer lending, Prosper, return, risk

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