I am now an official member of the peer to peer lending scene at Lending Club. Over the last couple years I have read a lot of positive reviews of sites like Lending Club, but never fully investigated the opportunities to participate in peer to peer lending there. Between the daily drum of stock market decline and notices of savings account rate reductions, I finally decided it was time to review my portfolio mix and find an alternative place to park a small bit of cash, and the peer to peer lending scene at Lending Club seemed attractive enough.
Since I am a complete novice at social lending, but not the lending side of business (I worked in credit for several years), I decided to start small with a $100 investment and review my performance after a few months. I signed up for an investing account at Lending Club, funded my first $100 via my linked bank account, and I was off.
One of the things I like about Lending Club is the ability to spread your investment across a number of individual loans through a tool called LendingMatch. Think of it as a mutual fund for lenders – you select the criteria for borrowers you are interested in loaning money to and the desired range of interest rate, and LendingMatch returns a number of loans meeting your criteria. You can then invest in a single loan, or fund a fraction of dozens of loans to spread out the risk.
Risk/Reward Model
Big banks often get beat up for charging excessive interest rates. I know I’ve griped about it enough here at Frugal Dad. But social lending puts you on the “other side of the desk.” You scrutinize borrowers a little more closely, and review their stats, when some of your own skin is in the game. You expect to make a little more in interest for a high-risk borrower than you would someone who appears to be a lock for paying in full and on time.
As with any investing, there are risks with peer-to-peer lending. Borrowers could default on the loan and you could potentially lose your investment, so it pays to scrutinize potential Lending Club borrowers closely and balance a portfolio of both low and high risk borrowers.
Personal Stories Are Compelling
In addition to the chance at earning a decent rate of return on my investment, I also like the idea of funding someone’s dream, or helping them consolidate debt at a decent rate to pay off accounts with outrageous interest charged by their credit card issuer.
At Lending Club lenders have the ability to review borrowers’ profiles which includes their credit score range, income (which Lending Club reviews for legitimacy), and a personal story from the borrower looking for a loan. I can usually review the profiles and line them up next to the numbers to separate those genuinely interested in borrowing and paying back money, and those looking for a handout.
I’ll report back in a few weeks to let you know how my loans are performing. So far, so good! If you are interested in joining me at Lending Club, simply follow the banner below to sign up.