If you have a little extra cash lying around, you may be wondering where you can put it to work to get yourself the best return. Should you invest in the stock market? Maybe mutual funds? How about real estate?
In the last few years, peer-to-peer lending has emerged as a trusted and respected way to diversify your portfolio while bringing in solid returns. I am consistently earning over nine percent with LendingClub. If you are ready to get started and put your idle funds to work, read on for a LendingClub review for investors.
What is LendingClub and how does it work?
LendingClub is a peer-to-peer lending platform that connects people who need money with people who want to invest.
In the past, only banks had the ability to lend money and bring in lucrative interest on those loans. With LendingClub, you can take on the role of the bank, but with only a portion of the risk. Investors can lend as little as $25 per loan to build a portfolio of loans. The more loans you have, the less you risk big losses.
Think of it this way: If you invest $100 in one loan and it stops paying, you lose 100 percent of your investment. If you invest $25 each in four loans, any of those loans can go bad without losing your entire $100 investment.
Of course, you’re not investing out of the goodness of your own heart. Borrowers apply for the loan through the LendingClub website, and based on their credit history and employment are assigned a risk score.
Loans are letter graded A through G, and interest rates are fixed for the three-year or five-year borrowing period. Five-year loans come with a slightly higher interest rate, and rates fluctuate with the broader economic interest rates set by the Federal Reserve and lending markets.
For facilitating the loans, LendingClub charges a one percent fee each month from lenders on payments submitted.
How to make the best return with LendingClub
Making loans with LendingClub is both an art and a science. Get ready to put on your banker hats, because we’re going to look at a loan as you would if you were a banker deciding whether or not to approve the loan.
When you fund your account, you can use the “portfolio builder” tool to have LendingClub automatically put together a portfolio of loans using your criteria, or you can pick the loans individually. I usually pick them individually so I can look at every detail on the application, but that does take quite a bit more time than the portfolio builder. If you have at least $2,500 in your account, you can set up automatic investing (and reinvesting idle funds) for no extra fee.
When you open the screen to browse open loans, you can set filters to zero in on any specific risk level you feel comfortable with. You can also sort by interest rate, loan amount, percent funded, term (36 or 60 months), credit score, and loan purpose.
When searching for loans, I generally eliminate borrowers with any public records and any late payments in the last 60 months. I’m pretty conservative with who I choose, and usually do not pick any interest rates higher than C grade, though I have a handful of D grade loans in my portfolio.
When you open up a specific loan, you can see even more details. I look at the debt-to-income ratio, outstanding credit balances compared to income, and how long they have had their current job to get a better idea of the type of borrower.
(Photo credit: LendingClub)
For the loan above, I would note that the borrower has a pretty good income, but still has over $35,000 in credit card debt, which is almost 70 percent of available credit. The borrower has held their job for over 10 years, and the purpose of the loan is debt consolidation.
The $24,000 loan would pay off about two-thirds of all outstanding credit balances, and the borrower has no public records, no collections, and no delinquencies. Probably a fair loan for an investment.
If you want a super detailed look at all of the criteria I use, check out my Ultimate Guide to Making Money on LendingClub.
The risks with LendingClub
With a diversified portfolio, you have less risk of losing money overall, but it is absolutely possible to lose money with LendingClub.
In my time as a lender, I have made 106 loans. Of those, 54 are fully paid off and 38 are issued and current. Four loans are currently late, one is in default, and nine have been charged off. In dollars, that is $1,349 paid back, $625 outstanding and current, $64 past due, $20 in default, and $169 in losses. I’ve brought in $494 in interest, which far outweighs my losses.
One big risk with LendingClub is that the loans are not collateralized. When a bank lends someone money for a mortgage loan, the bank gets to keep the house if the borrower stops paying. The same is true with car loans and any other loan with collateral.
LendingClub loans work more like a credit card, except that they are scheduled to be paid back over a fixed period of time with a fixed monthly payment. If the borrower stops paying, you don’t have any recourse to get the funds back. Further, the only incentive borrowers have to keep making payments is to uphold their end of the contract and protect their credit score.
Is LendingClub right for you?
There is no right or wrong answer when deciding if you want to invest in peer-to-peer lending. Consider the pros and cons laid out in this LendingClub review, then be honest with yourself — judge your own risk tolerance, your willingness to invest with a 3 to 5 year horizon before getting completely paid back, and your comfort level with giving your money to complete strangers in the hopes of being paid back.
On the other side of the coin, with a diverse portfolio of loans you can see great results. I used to see more than 12 percent returns, but over time I have seen more defaults, and my rate has fallen to 9.17 percent. Even with the decline, that’s a heck of a lot better than you can get at a bank. If it’s worth the risk to you, peer-to-peer lending can be a great investment.
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