Monday, May 13, 2013

Peer-to-Peer Lending


How do you like to invest your money? Stocks? mutual funds? Personally, figuring out stocks and mutual funds feels like a guessing game at times. So an alternative method that I feel gives me more control and that's more understandable is peer-to-peer lending.



Have you heard of Peer-to-Peer lending? There are two main companies that have become popular: Prosper.com and LendingClub.com. I'm most familiar with LendingClub.com and it seems to be a better company so I won't talk about Prosper.com.

What is LendingClub.com?
LendingClub is Peer-to-Peer borrowing and investing. Basically, it lets you give loans to other people and in turn you get interest on those loans. You are basically acting as the bank in handing out loans to different people. You can loan out as much or as little as you want to thousands of different individuals. You'll have to check out their website for more information.

Is there any risk?
Yes, there is risk involved like any other investment. If the loans you invest in go into default and become delinquent you can lose that money. For this reason a good strategy would be to get many loans in small $25 or $50 increments. The more loans or "notes" you invest in, the less risk involved. Lendingclub.com's will give you some statistics that are interesting. Basically, if you invest small amounts into lots of loans, the risk is very, very minimal. They assess all the loan applications to determine which one's are good and only approve less than 10% of all the applications they receive. Then they rate the risk of the loan from A to G. The more risky the loan, the higher the interest rate and potential reward. They basically rate this off of FICO score, income, debt, history, etc.

How much can you make?
Of course this depends on your investment strategy (which type of loan you buy, how well you screen the loans, how long do you keep them, diversity, how much you invest, etc.). You can make 5%-20% on average. Most people probably make about 10% a year. Of course you can lose money too. I would only fund no more than $25 to $50 in each loan.

Can I sell my loans if I want to liquidate my loans?
YES! You can sell your notes if you don't want to keep the loans you have via their trading platform  If the loan you have has been paid on time every month, you can sell it very easily for the full value (or even a little more). If payments have been missed on the loan or have been late a lot you'll probably have to sell it for a little less than the full value. If payments are not being made, you probably will not be able to sell the loan. Of course you can buy notes from others. I actually bought all of my notes instead of investing in the original loan. There is a small 1% fee for selling your notes.

What's been my experience?
I only invested $500 to see how it all works (and I recommend you only start with a small amount to fully understand how it works). You can not invest in notes directly in several states including Arizona (some stupid laws), so I had to purchase all my notes on their trading platform. I probably got about 25 notes in the $10-$50 range. I decided to liquidate/sell all my notes after a year to see how easy it was to liquidate them. It was fairly easy to do so. I ended up making about $55 so close to 10%. 3 notes/loans did go delinquent and I never got my money back on these loans. If those loans didn't go delinquent then I would have made over $100 or closer to 20%. To me it seemed like the A notes were almost as risky as the higher risk notes such as G and E, but I do have limited experience and # of notes I bought.

My strategy for lendingclub: don't buy any notes over $50, diversify, it's okay to get riskier notes such as D, E, and F (just make sure there is not anything completely alarming about the loan), generally I like to get the 36 term loans instead of the 60 month term loans, and try and sell the note if they have been late with their payment. If you buy notes off their trading platform: Don't buy notes that have missed payments or have been late, don't buy notes that haven't received payment in the last 28 days, and the same ideas as above. I would love to help you out if you decided to give it a try and have questions!

Overall, I think LendingClub.com is a cool idea and good alternative way to invest other than more traditional methods.

...If you want to invest using LendingClub you can get a $25 bonus from them by using THIS LINK. However, to qualify you have to have your initial investment be at least $2500.

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