Ok, let’s talk about one of the apps I use to save and make a little bit of money. I’ve probably been using Lending Club the longest so it appears to be a good place to start. Lending Club offers peer-to-peer (P2P) lending which means lenders, for lack of a better word, kick in $25 (or more if they’d like) to fund a borrower’s loan request. Borrowers can borrow money for everything from credit card refinancing to putting in a swimming pool and a bank (WebBank) deals with the hands on process of qualifying the borrower and servicing the loan.
For months my coworker pestered me about it until he even offered to give me my first $25 to invest. I didn’t take him up on his offer but I did finally add $50 to my account in October 2011 and invest in my first two loans.
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| My first Lending Club statement |
As you can see my initial investment was relatively safe and with that, lower paying. Lending Club grades their investments from A-E (when I first started investing the scale was A-G) with a further breakdown such as A1-A5. A1 is the safest and the lowest interest earner. The more risk you take - the higher the probability your borrower won’t make payments - the higher your return will be.
It’s important to note: you can lose money (and I have). These investments are not guaranteed in any way, shape or form. The way I looked at Lending Club money was as an expense. In other words, I considered that money gone. This isn’t a savings account, but because of the higher risk I was looking at a 7-8% return when my savings was paying .05%.
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| Some of my Lending Club loans |
Now that I’ve probably scared you with all that risk talk I’ll tell you the good news. From October 2011 - October 2013 I invested $186 sporadically into my account and reinvested all the money I earned back through principal and interest payments. Today my account balance is $288 and I am currently investing in 18 loans. That’s right, I invested enough cash to buy about 7 loans but reinvesting it all more than doubled my loan holdings. Pretty cool if you ask me. I did invest my original money when money wasn’t as tight and as I said I never looked at it as a sure fire thing.
The downside is it has taken five years to build up the balance but if I had been more proactive and invested more over that time frame my balance would hopefully be much larger.
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| My charged off Lending Club loans so far |
So what’re my Lending Club tips? Glad you asked. These are not mine. When I started investing I found an article (which I can no longer find but would love to link to if you can help a girl out) that offered the following tips.
1) Avoid borrowers in California. Apparently the default rates in the west coast state were the highest at one point in time. This could be no longer accurate but I still avoid Californians on Lending Club, in real life I find they’re excellent people - maybe just people I wouldn’t lend $20 to anymore.
2) Avoid renters. Lend to people that have a mortgage or own their home outright. I’m sure this has to do with stability. Renters are probably more likely to move to a different job or maybe it’s just the fact that homeowners are viewed as more responsible. I’m not making either argument, just speculation as to why this was on the original list.
3) Lend to borrowers who have more than 4 years at their current employer. Again, I’d imagine this is a stability thing. Sticking it out with the same employer for so long must lead to the assumption that they’re likely to stick around and get that paycheck a while longer.
I’ll add the following to this list:
4) Lend to borrowers with a credit score above 700. The higher the credit score the more comfortable I’ve been with loans. Don’t think this is fool proof - Lending Club offers E rated loans with borrowers with high credit scores but their metrics determine the probability of default is higher (think small business loans or borrowers with large amounts of credit card debt).
5) Keep loans small. I prefer to lend to someone who is asking for $5,000 compared to $15,000. Why? Because assuming a 9% interest rate the difference in payments is $318 over 36 months. An extra $300 some a month can be difficult to come up with in my experience so that leads me to be more comfortable with smaller payments. It may be psychological - smaller payments should be easier to make in my opinion so they’ll be less likely to fall short.
5.5) 36 months is preferable to 60. I'm going to call this tip 5.5 rather than 6 because I often break this rule. If I can find a loan meeting all my other criteria with a 60 month repayment schedule and one that doesn't meet all my criteria with a 36 month repayment schedule, I'm going for the 60 month option. I would prefer to only invest in 36 month loans and in the beginning I did, but somewhere along the line I started to choose some 60 month options and so far I haven't regretted it.
The one thing that sticks out to me about the 60 months is just what happens when we hit the next recession? Since we don't exactly know when it'll be it seems like the probability of it happening five years out is greater than it happening in the next three years. But I'm no economist and I do remember my original article claiming the default rates were about even (Please, someone help me find that article!).
If you're curious about what other people have to say about Lending Club, check out this article for more investment strategies and this comprehensive beginner's guide.
For a more cautionary tale check out this article. He's probably not wrong about his advice to realize that sometimes people lie. But, yikes.
Obviously I'm totally small time with my $300 but it's something fun to do and I like that 1) I help someone accomplish some goal and 2) I earn an 8% return. I'll keep you updated on my progress as I go along and maybe one day I'll even add some more money into my account. Here's hoping!
Have any Lending Club tips? I'd love to hear them!
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