There are lots of great reviews of Lending Club out there. To name a few, Mr. Money Mustash has a series, and Lend Academy has a great YouTub as well, see below. What I’d like to touch on is why peer to peer lending is cool, and how to buy notes that are in high demand.
According to Wikipedia “peer to peer lending is the practice of lending money to unrelated individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other traditional financial institution. This lending takes place online on peer-to-peer lending companies websites using various different lending platforms.”
In short, instead of the banks giving you a loan and collecting the interest, you get a loan which is funded by other individuals who then get to collect your interest. This is more egalitarian and keeps your money in the hands of your “peers” instead of funneling it up into the big banks and the “1%”. There are several other peer-to-peer companies out there, but I prefer Lending club. They’ve been around for about a decade and have proved to be a valuable resource for both investors and bowers.
About buying notes
When Lending Club gives someone a loan they break that loan into what they call notes, or small pieces of a loan. This is central to what makes peer to peer lending viable because it allows small individual investors like me to diversify, and reduce the effect of defaults.
Lending Club is growing, and the influx of investor capital has made it harder to get the better yielding notes because they get bought up as soon as they are released on the platform. As a recent convert to Lending Club, I can’t compare to what it used to be like, but I am surprised at how quickly desirable notes are getting snapped up.
New notes are released four times a day (6 AM, 10 AM, 2 PM, and 6 PM PT) on the Lending Club platform and I had to set my alarm so that I could be logged in and ready to click on notes, that met my filter, the second they were released. It took about a week to buy 100 loans, which is the minimum recommend by Lending Club. There is also an automated investor feature that will do this for you, but there are a lot of factors to consider when buying notes and I like to look at each one individually to determine if I want it or not.
The notes that have done the best in the past at Lending Club are the ones with the highest interest rates, say the 16% to 25% interest rates. Although these are more likely to default they more than makeup for it by paying the higher rates.
There are also other factors too, such as length of employment, own vs rent, monthly income and debt to income ratio, also past delinquencies and public records, and of course, credit score. The high-yielding notes that are most desirable are those with at least four years employment, own home, no past delinquencies, reasonable monthly income, and few inquiries in the last 6 months. Notes that meet these criteria have historically done the best, but it takes some legwork to fill a portfolio with them. But building financial independent takes some legwork to be sure, so that’s ok, it’s pat of the lifestyle.
Up-Date April 2017: My Lending Club results have not been as robust as I had hoped over the last year, but I have learned a lot in the process. When I made my original 100 note purchase over the course of a week last year I invested too heavily in high-risk loans. This may have been ok but my note selection was hasty and now looking back I see some of those notes have glaring issues. I have had about 20 notes charge off, although most of these I would consider normal loss, there are a good hand full that were bad, or “subprime”. Factors that I failed to fully factor in were DTI (debt to income) credit line utilization, total income vs size of the loan, monthly payment, and interest rate. It is unrealistic to expect someone making 40K a year to be able to pay back 20k and a 26% interest rate in just 3 years, or ever for that matter. I now stay mainly in the C and D note range and look more closely at the notes I’m buying into. Trial and air, I still have a positive return on my account, and I was able to write off my charged off notes. I think a good starting point for new investors would be to invest in lower risk loans until you feel more comfortable selecting the higher risk (and higher return) notes.
“In finance, subprime lending (also referred to as near-prime, non-prime, and second-chance lending) means making loans to people who may have difficulty maintaining the repayment schedule.” – google
—Check out my other post about How to Build 5000$ in a year using Lending Club