When it comes to my investment strategy, I have always been conservative and have always had a one-track mind. Vanguard index funds were all that I needed. The simplicity, the results, and the low expenses had me completely hooked and I had no thoughts of straying from that path.
That is, until recently.
Suddenly, I am trying out new strategies, using different channels, I’ve already discussed how I’ve jumped in to real estate investing (I spent many hours, researching and learning beforehand, don’t worry) and now I’m writing a post about peer-to-peer lending! What’s going on with Mr. NYBudget?
Well, let’s back up. First of all, what is peer-to-peer lending and what role does Lending Club play?
Lending Club – The Basics
You can think of peer-to-peer lending just like any other bank loan. A person approaches a bank and asks for a loan. The bank gives that person money, which they must then pay back in regular installments with interest added in to each payment. Peer-to-peer lending is similar, except that YOU are the bank. You are lending people money to create businesses, pay for education, etc. Similar to how Kiva.org works, you don’t have to lend the entire amount that the person needs. You lend $25 at a time and hundreds or thousands of other lenders chip in $25 as well until the loan is fully funded.
Because the minimum you can loan to one application is $25, you have the ability to diversify by making small loans to a LOT of different people. That way, if one person defaults, you are only out a maximum of $25 (less if they default partway through their payments).
Lending Club facilitates all of these transactions and takes a cut. From their website:
We collect fees from both borrowers and investors.
If you are a borrower, you will pay a one-time origination fee that ranges from 1.11% to 5.00% of the loan amount, depending on your loan grade (A-G) and term. For more information, please visit our Rates & Fees page.
If you are an investor, you will pay a service fee of one percent (1%) of each payment received from the borrowers.
And that’s pretty much the setup.
The loans that Lending Club features have grades. A-rated loans are ones that they believe are the safest. The borrowers are most likely to pay those back and not default, based on credit score/history, and indicators from their loan application. However, the A-grade loans will also pay you the lowest interest rate percentage (about 6-8% annually). On the other end of the spectrum, G-grade loans are riskier, but pay 20-21% interest rate.
After reading and research, I found that the best strategy is to fund the lower grade loans because the higher interest rate more than makes up for the increased risk. Also, the fact that you are so well diversified across many loans helps lessen the risk of those lower-grade loans. If I put ALL my money into one loan and it happened to default, I would NOT be happy. However, my loss of one $25 loan can be absorbed by the hundreds of other loans that are being payed on time. Diversification helps smooth out your risk.
So I went aggressively after low-rated loans. I used a site called Nickel Steamroller to set up alerts. Every time a high-interest loan that met my criteria (no loan consolidations or credit card debt, no previous defaults), I would get an email. Now, these loans get funded FAST, so at 9:05 am, 1:05pm and a few other times throughout the day, I would get an email alert and I would have to JUMP on those investment opportunities. I would sign into my account and fund each one manually. It took me a LONG time to use all the money I had deposited into my account and was taxing. After a few months though, I was doing well! Seeing returns in the 20% (annual) range!
Then, Lending Club came out with automatic investing and I decided to hop on that bandwagon. You can choose to favor lower-grade opportunities, but otherwise, you can’t specify your criteria like you could with Nickel Steamroller. My percentage return suffered. I am currently around 18%. However, I will gladly take that hit in order to sit back and avoid the crazed race to invest at 9:05 every morning!
Honestly, I’m pretty pleased with how Lending Club has performed. With real estate, I really believe in the principles and I believe in the turnkey company that I chose. However, Lending Club was a bit more of an experiment for me and thus, I chose to start out investing $5,000. Now, that is a decent chunk of change, but not as much as real estate generally requires (at least given my investing strategy).
I have been doing this since October, 2013 (it took me until December to invest that first $5,000) and as I mentioned, I am holding steady at around 18% return. Given that, I may add another $5,000 here in the future.
If you are thinking about investing with Lending Club, make sure to do your homework first and remember one thing. Yes, you ARE diversified through lending to many different people. However, if Lending Club went belly-up as a company, you would NOT be diversified in that sense. I’m not sure exactly what would happen, but I imagine something to the effect of all your money being gone. Lending Club is definitely stable for now and the chances of that happening are slim, but I feel obliged to give you fair warning.
Have any of you invested with Lending Club? Share your experiences! Or feel free to ask any questions you have in the comments!
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