Have you given any thought about what you want to do with your extra income? Perhaps you may want to look into some alternative investment strategies. Whether it’s your blogging income, or extra money that you are earning from other sources, you should give some thought about how you invest your money. While everyone should have some traditional investment strategies, IRA’s, stocks and bonds, etc… I also set aside some money for some alternative investment strategies.
One such program that I believe is ideal for a blogging income is peer to peer investing. There are several peer to peer investment companies, however my personal choice is Lending Club. I like using Lending Club for several reasons:
- It’s free to join
- It’s free to maintain
- They have been in operation for several years which equates to stability in my mind
- They give a signing bonus in most cases. (I got $100 when I joined)
- They allow investments in small amounts ($25 at a time)
- I get a good rate of return on my investments (16.80% currently, results may vary)
How does it work?
Have you ever thought that the banks and credit card companies really run a good money making business? Essentially a credit card or bank loans a borrower some amount of money and charges an astronomical interest rate on the repayments.
As an alternative investment strategy, earning interest on loan repayments appears to be incredibly steady. Not to mention that the interest rates can get fairly high, in the case of some credit cards averaging about 30% of the balance. Wouldn’t it be great if private parties could get into this alternative investment as well?
Now, the advantage of the banks is that they have collections people. The bank has access to collections agencies that call and harass you until you pay if you are late. Banks also have access to more resources to check the background and credit of the potential borrowers to ensure that they are making a quality investment. Most people just don’t have the resources to get into this kind of investment.
What’s a poor blogger supposed to do to get into this business?
Enter Lending Club.
Lending Club allows individuals to connect with each other and invest in each other. Thus someone that needs money can apply to Lending Club for a loan. The terms of the loan are fairly traditional. You borrow a certain amount with a repayment period over a certain amount of time, either 3 years or 5 years. Then each month the borrowers make payments on the loan that include some amount of interest. The interest is determined by their credit rating.
Fairly standard, but the unique part is that the loans are also funded by individual investors. So, you can open a free investment account with Lending Club and start looking through the loan applications and contribute towards funding the loan. Then you will receive the benefits of the interest payments on the loan.
It’s not required that you fund the entire loan amount yourself. You can contribute as little as $25 towards a loan, and you will receive the proportional amount of your contribution back on the payments. This allows you to diversify your lending club investments and reduce the risk of loss in case of defaults.
What’s the risk?
Every investment has a risk involved. When you invest in stocks, you are taking a risk on the company. If the company goes bankrupt, you stand to lose the money you invested in the stock.
The risk with peer to peer lending is that you are investing your money on an unsecured loan. In theory, the borrower could default on the loan and run off with the money. Now, there are a lot of protections to prevent that from happening.
The first safeguard is you. You as the investor have complete access to the loan application. Lending Club makes sure that everyone fills out a complete loan application, which includes verified income from their tax returns and their credit history. In addition, the investors can pose questions to the borrower to assuage their fears.
This process lets you know exactly the reasons why someone is borrowing money and gives you a clear picture of their credit history so that you can make a wise investment.
The next safeguard is that you can diversify your investments. You can spread out your investments in $25 increments so that you don’t risk losing all of your money in a single loan. This is a wise investment strategy overall. The fact that they allow you to invest such small amounts makes the individual risk quite low. For example, I have almost $500 spread out amongst 22 different loans in $25 increments. That way if any single loan defaults, I only lose at most $25.
The third safeguard is the collections process. Lending Club handles all aspects of collecting the loans, so you don’t need to have Mean Joe go out to break legs. They have a collections staff that handles negotiating payments and contacting borrowers to any missed payments. Also, if there are any late fees, the investor will also get a portion of the late fees.
The fourth safeguard is that Lending Club also has a trading marketplace where you can sell your loans to other investors. It’s a way to cut your losses if needed. Why would people buy your loan?
In many cases, even if a loan goes into default, the borrower is contacted and brought current on the loan, including late fees. This makes some of the defaulted loans attractive to other investors. If you sell off your loan, you may take a slight loss, however it will be less than the full $25 amount.
So, even though these are unsecured loans to individuals, I believe the actual lending club investment risk is not as great as what some people may perceive.
In my case, I have invested in 22 loans. I average a rate of return over 16% for these loans. In fact, I get a high return because I actively select the loans that have the highest interest rate. This also means that these are the loans with the highest risk on paper.
However, despite the fact that I am , in theory, choosing the riskiest loans, I have not had any defaults in over a year. I carefully evaluate each of my loans and read over the application and check the credit history before I invest to make sure I reduce this risk as much as possible. In 22 loans, I have 1 loan that was late and got onto a payment plan and no defaults. This is over a course of a year, so my history appears to be fairly good. The one person who is on a payment plan is actually paying some additional fees, so it gives me a greater rate of return on that lending club investment.
What to Look for in a Good Lending Club Investment
I review several factors when I look for a good lending club loan investment:
I check the rate of return and look for the higher rates of return
I also look at the purpose of the loan. All of the loans have a stated purpose. The borrower will explain why they need the money. By far, the largest segment of the population is borrowing money for debt consolidation. However, you will also see people borrowing money to make large purchases, home improvement, or even wedding planning.
I actually prefer investing in the debt consolidators. Early on, I reviewed the overall statistics that was provided by Lending Club and the debt consolidators had one of the lower risks of defaults. The other low default risk loans that stood out to me was for wedding planning.
I figured that psychologically that made sense. The debt consolidators may have been bad at managing their debt, but they were conscientious about finding a method to pay off their debt. If they didn’t care, they wouldn’t be looking to consolidate their debt, they would have defaulted long ago.
Of course the wedding planners probably feel that it’s just bad karma to default on the loan that was used to pay for their wedding. So, they likely put extra effort into paying that debt first.
Now, I also take a careful look at the loan application. You have complete access to the borrowers credit history, so it’s good to make use of that tool. It will tell you if the person has had any late payments in the previous two years. I make sure to rule out the borrowers that have had recent late payments. This ensures that I am actively investing in someone who makes his payments.
The third item that I look for is to see how the borrower answers questions from potential investors. As I stated earlier, the investor can pose questions to the borrower. These questions are often very detailed. People will often ask the borrower to list all their debt and the interest rates. The questions can be very insightful about the reasons behind the loan. They may ask what the borrowers plans are to pay off the loan. In any event, the answers are more important than the questions.
I actively look for the borrowers who give complete and detailed answers. This tells me that the person is considerate to the investors and also has a well thought out plan about paying the money back.
Using these criteria to weed out the bad Lending Club investments, I’ve been able to invest in the loans that give a higher rate of return and I get good results.
Everyone will have their own investment strategy and criteria, and the variety of investments is very good with Lending Club. You can easily select someone with the highest credit scores and reduce your risk for a lower rate of return. However, even by doing that, your rate of return will be much better than most traditional investments.
The average rate of return on Lending Club investments is advertised at over 9%.
Overall, Lending Club offers a good place to invest your money. You can help others who are in need and diversify your risk by making spread out smaller investments.
Not to mention that it’s absolutely free to open an account.
So, if you don’t already have an account with Lending Club, go ahead and check it out. It may be worth your while.