A year ago I took the plunge into peer to peer lending. I invested a small amount of money into Lending Club to see how I would fare in this new social investment.
Generally, I try to be a careful investor. I favor value stocks over hot growth stocks. I like to save my money. At the same time, I am interested in looking at different ways that I can also grow my money. (Hence my adventure into making money online)
I’ve always thought that banks had a great monopoly on making money with money. They have a great system. They use other people’s money to pool into a huge fund that they can invest in loans and then earn large interest rates. Of course, they pass down a minuscule amount of their earnings in the form of interest on your savings account. If you’ve noticed, I’m quite literal with the word miniscule.
So, when I heard about peer to peer lending, I was interested in learning more about this kind of investment. After all, I’d like to find a better way for my money to work for me.
What is Peer to Peer Lending
Peer to peer lending is a social investment system. This is a service that connects potential borrowers with lenders. Borrowers can apply for a loan. the service runs all the background checks and makes the information available to the potential lenders. Then the lenders can look through the investment and choose to invest directly with the borrower. The other aspect of this system is that the lenders can pool their wealth in order to fulfill the loan amount. That way they can limit their risk. A lender can contribute as little as $25 towards the total loan amount.
The benefit is that the lender earns money based on the interest that the borrower is repaying. These services can afford to pay out much higher portions of the interest earned back to the lender due to the lower operating costs.
Investing in Lending Club
I did my research and was interested at the prospect of investing in peer to peer lending. I found that there were two major services that have built a reputation in the peer to peer lending industry: Lending Club and Prosper Marketplace.
Both services appear to be reliable. Prosper has been in operation one year longer. They advertise slighter better average returns, but during my research I found that the tradeoff for those returns were perhaps funder weaker loans. While both programs provide a good amount of information to the lenders so that you can limit your risks, I choose to put my money with lending club.
Based on what I was reading, it seemed as if Lending Club had a more scientific and objective formula for rating their loans and setting their interest rates based on the loan grade. Prosper uses a bidding formula where the lenders put in bids for the interest rate. The Prosper formula seemed a bit riskier to me. And it seemed to me easier to understand the interest rate and lending system with Lending Club. While both services have their different advantages, I just felt more comfortable with a system that I felt I understood better.
Here are some other things I liked about Lending Club:
- They are FDIC Insured. (FDIC covers only the uninvested cash balance in your account. The loans are unsecured investments)
- They gave me a signing bonus. (They currently give you 2% of your initial deposit)
- I could invest $25 at a time (This reduces the risk for me)
- They do a thorough background check (requiring document verification w2’s etc…
- Set formula for rating loans and interest rates
So, I made my decision and started a small investment account with Lending Club.
My Lending Club Investment Performance
One thing I liked was that I could start with a small investment of money. Since this was a new type of investment, I wanted to be careful and not sink in a lot of money. I put in a few hundred dollars. The idea was to learn how to invest with Lending Club and see how my money fared.
One thing that pleased me was that they gave me a $75 sign up bonus with no strings attached. I was able to immediate invest that money into a loan as soon as it showed up in my account. (They do have a short waiting period to since the bonus is based on a percentage of the money you transfer into the account.)
Currently, I have almost $600 invested for over a year with Lending Club. I have 30 different investments. Over the year, I’ve had steady returns. My annualized interest rate is just over 17%.
Here’s a few screenshots of my accounts performance:
Here’s a breakdown of my Lending Club payouts so far:
As you can see, the actual amount of interest I’ve received is closer to 50% of the principal that’s been paid back. This is higher than my net annualized percentage due to the formula used to annualize returns. (It’s complicated math) The bottom line is that my actual returns appear to be better.
The other thing I should mention is that I reinvest my earnings back into lending club, which essentially compounds the interest that I earn. So far, my investments are paying off quite well.
What about Lending Club Risks?
I had my own reservations when I first started my Lending Club investment. The big concern is that someone will default on their loan and I’ll lose my entire investment.
In retrospect, I think that I don’t have much to fear from losing my entire investment. Virtually everyone will pay off some portion of their loan before they run into trouble. If they had no ability to pay off the loan initially, they would not have been approved. Non payment likely arises more out of a change of circumstance than complete irresponsibility.
Nonetheless, this is a risk to consider.
So, in retrospect, how have my loans fared?
I have 30 outstanding loans, so I think I have a fair sampling size.
Here’s how my loans have broken down:
Of my 30 loans, 27 are current, 2 were fully paid off early, and 1 is late.
It’s the late loan that is a concern.
What happens when a loan is late?
Lending club provides a loan collection and negotiations service. When you look in your portfolio, you can see the different efforts that Lending Club makes to contact a late borrower and negotiate the loan.
Here’s what that collection log looks like in the case of the late loan in my portfolio:
As you can see, they go through quite a lot of effort to contact late borrowers and protect your investment. In my case, the borrower agreed to a payment plan and is currently making payments. The bottom line is that there are quite a few steps to go through before one actually defaults on the loan.
In this case, the borrower is on a payment plan and has repaid $10.72 already in interest and principal.
Lending Club Investment Summary
Overall, I am very pleased with the performance of my Lending Club Investment portfolio over the course of the year. I had some reservations about potential risks, but after watching how Lending Club handles my investments, I feel comfortable with their services. At this point, I believe that Lending Club is a strong investment vehicle and a very good investment for my money.
Frankly, over the last year, Lending Club has been outperforming all my other investments (stocks, mutual funds, cps, etc..) by leaps and bounds. After tracking my investments, I feel that I have a good sense of the risks and benefits of investing my money with Lending Club. I believe they are stable enough to add to my standard investment portfolio.
These days the economy is a roller coaster. It’s time to look at different ways to invest and continue growing your wealth. Based on my performance over the last year, I would recommend anyone to consider investing with Lending Club.
Click on the image below to sign up and start investing with Lending Club now! (They’re giving out a 2% sign up bonus on your initial investment when you sign up)