About Lending Club and Peer to Peer Lending (P2P)
Introduction to Peer to Peer Lending
Lending Club and other peer to peer (P2P) lending platforms have been gaining traction the past few years. The basic idea is that members directly borrow and invest with each other and eliminate the cost of a banking system. By passing that savings on to the members, it creates good rates for both borrowers and investors. I have personally been investing with Lending Club for about 1 year where my net annualized return is at about 13%.
About Lending Club:
Lending Club was started in 2007 by Renaud Laplanche with the goal of offering an alternative to traditional banking while offering great rates to borrowers and investors. All of the loans are made through WebBank, a Utah-chartered industrial bank. Notes are offered pursuant to a prospectus filed with the Securities and Exchange Commission. From the date of this article, Lending club has funded $1.4 billion and paid out around $117 million to investors. They have received many awards and recognition.
My Lending Club Investment Strategy
Tips and Tricks to P2P Lending
Everyone has their own style of investing. I am personally a younger investor that has a pretty conservative style when looking through these notes. Your performance with any peer to peer lending is a function of the default rate in your portfolio. Lending Club rates their notes on a letter scale from A to F (See chart #1 below). These letters represent the perceived risk of the notes, F being the highest risk. Less than 10% of loan applicants are approved which shows how stringent LC is in selecting creditworthy borrowers.
As I mentioned before, I am somewhat conservative on what notes I pick. Investors can simply choose the desired return and LC will build you a sample portfolio that you can review. I used this strategy when I purchased my first 100 notes because I was impatient and did not realize how helpful the filters can be. Now I filter all of the available notes and hand pick each one. Below are the basic parameters that I use (See Screen Shot below for visual).
- Max Amount Per Note: $25 (I like to spread my risk as much as possible)
- Max Debt to Income Ratio: 20%
- Term: 36 Months (This is strictly personal preference)
- Credit Score: 710 Minimum
- Months Since Last Delinquency: 60 months or more
- Min Length of Employment: 2 Years
- Delinquencies the Past 2 years: 0
Some other things I look at are the amount they are borrowing. I am more apt to lend to someone who has a very specific dollar amount requested (for example $17,275) versus someone who is requesting a big round number (for example $10,000). I view it as someone who has really done their homework and came up with an exact amount they need. This shows dedication and discipline. Also, take note of the purpose of the loan. I like to look for home improvements, weddings, and credit card refinancing. I tend to stay away from medical, vacations, and small businesses.
Note Filters Screen Shot
Experienced peer to peer investors will tell you there is a lot more to this then looking a projected rate of return and placing an order. They are exactly right. I have just scratched the surface on the basics of P2P lending. Many investors export available notes to spreadsheets and use strict formulas. Others are very active on the trading platform which allows you to buy and sell your notes. Do your research and find a strategy that fits with your personal financial goals.
Peer to peer lending has been viewed as a speculative investment by many but it offers a different way to diversify your portfolio into a new asset class. It is pretty simple to get started and LC makes it easy for investors to sort and choose notes. I would recommend committing around 2-5% of your portfolio to Lending Club or another peer to peer lending platform.