Live Debt Free

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Social Investing with Lending Club

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Awhile back I wrote a detailed review of how I borrowed from Lending Club to consolidate debt.  Today we’ll focus on investing with Lending Club.

Experience with Lending Club

Read this review with confidence knowing that I have personal experience using the Lending Club platform as both a borrower and a lender – most other reviews do not.

Benefits of social investing

First let’s consider some of the benefits of social investing (a.k.a. peer to peer lending), I’ll list the top six as I seem them, feel free to add any I miss.

  • High returns – In the last 2 years I have a net annualized return (NAR) of 8.27% which is much higher than my stock market investments.
  • Solid stock market alternative – Many people are uncomfortable investing in a volatile stock market they have little to no control over, I’m one of them. Social investing is a solid alternative that pays well and offers more security (as long as notes are chosen carefully).
  • You can help people – People are borrowing for many different reasons, many of them are honorable. Choose notes for debt consolidation, business loans, or anything else you’d like to support. The point is, you can help people with something you’re specifically passion about, which is cool.
  • Set on your own criteria – Tweak borrower criteria so you only see notes that fit your investing goals. Create and save filters based on your criteria and only invest in notes that fit those criteria. (Watch the video for more detail.)
  • Easy to diversify risk – Choose different grade loans to diversify risk. Higher risk accompanies higher returns so diversify based on your comfort level.
  • A secondary market  – Using the FOLIOfn note trading platform (a.k.a. the secondary market) you can resell trouble loans or purchase undervalued loans that fit your risk profile.

How to pick notes

One of the best things about social investing is the ability to pick what your money will be used for. I prefer to support those looking to consolidate and eliminate debt, so I do. Maybe you want to fund small business start ups or help people pay off medical bills. It’s up to you and that’s super cool.

  1. Use filters – Before browsing available notes, build and save filters based on criteria that will help lower risk. (Watch the video for more detail.)
  2. Choose loan types – Typical loan types go toward debt, businesses, weddings, and home renovations. As mentioned, I commonly stick with debt consolidation loans because I like helping people get out of debt – invest where you want to help.
  3. Diversify amounts – Invest small amounts in many different notes to diversify risk. I typically set a limit of $25 or $50 per note so if any particular note goes into default, I minimize loss.
  4. Diversify grades – You have a choice of notes ranging from grade A to grade G. Typically A grade notes are safest and G grade notes are most risky, with a sliding scale for other grades in between. Nearly 50% of the notes I chooose land in grades B and C, but the other 50% are spread throughout the other grades to help boost returns while still providing a level of security.

Don’t make the mistake of assuming loans are less risky simply because they carry a higher grade, while this is true a majority of the time it can also bite you if you ignorantly postulate without due diligence. In my experience with defaults (there have been three) 2 were grade D notes and 1 was grade A.

Always carefully inspect each note before investing.Social Investing with Lending Club

I encourage you to read more about investing with Lending Club and to open an account if it’s a good fit for your situation.

Video example of social investing

I captured this video to show you around the Lending Club interface and to give you a brief example of how I go about investing in notes.

(If you cannot see the video click here.)

Get started by reading more about investing with Lending Club and opening an account if it’s a good fit for you.

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Successful Peer to Peer Lending Investing

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Today we’ll reveal the single most important success factor for peer to peer lending investors.

As Matt has discussed before he used to be a borrower on Lending Club but is now an investor with a growing portfolio. Peer to peer lending provides an excellent opportunity for investors to start out small (the minimum investment is just $25) and slowly grow their investment. There are two main players in peer to peer lending: the aforementioned Lending Club as well as Prosper. The principles discussed in this article will apply to both companies.

An Average Return of 10%

The average return for investors in Lending Club and Prosper is around 10%. So even if you earn the average return you are doing better than almost any other fixed income investment. The big question is, as an investor how do you ensure that you earn at least the average return? The key is diversification. You need to spread your risk among many loans.

Here is an example to illustrate how important diversification is for your return. Let’s assume that you have $1,000 to invest and you spread your risk over four loans at $250 each. If one of those loans defaults immediately then you have made a big mistake and thus are down 25%. Now, if your $1,000 is diversified among 40 loans of $25 each and that same loan defaults, you are down only 2.5% of your total. A 2.5% loss is much easier to recover from than a 25% loss.

Unless you are investing a large amount of money (say more than $5,000) I think it is really important to keep all your investments to the $25 minimum per loan. Unless you are very lucky you will likely have some defaults over the life of each loan, even in the lower risk loans, so it is best to minimize the financial impact of any such losses.

How to Diversify

Now you have seen the importance of diversification it is important to put this into practice. There are two main ways to ensure you create a diversified portfolio of loans.

1. Automated Plans

Both Lending Club and Prosper offer some kind of automated plans. This is where you just choose your amount to invest and your investment criteria (such as risk level) then they will invest in the largest number of different loans that meet your criteria. Now, once your account has been open for a while you will start to get cash building up in it from the interest and principal repayments. Depending how much money you have invested this can build up pretty quickly. So every week or two you should login and put your cash back to work, where you can choose the automated plans again to diversify your new investment.

2. Choosing Loans Individually

If you have the time and the inclination then you can choose which loans to invest in manually. When confronted with typically 500 or more loans on the Lending Club or Prosper platforms it can be a little bit overwhelming trying to choose loans. This is why both companies provide filters so you can select some criteria so you can include only the loans you want. For example, you can choose to only include loan grades B, C and D. You could exclude loans where the borrower has had a delinquency in the past two years or if they have been employed in their current job less than a year. There are dozens of filters to choose from and by selecting some you can whittle down the large number of available loans to something much more manageable. Then you can view each loan and make a decision whether to invest or not. Of course, as I said above, I urge you to stick to the $25 per loan investment if at all possible.

The Final Word

Nothing will potentially lower your returns more than an undiversified loan portfolio. You will always run the risk of one default negatively impacting your returns in a big way. A broad diversification of loans will spread your risk and give you the best chance of receiving at least the average return. And at around 10%, the average return is pretty darn good.

About the author:  Peter Renton is the publisher of the Social Lending Network, a blog dedicated to peer to peer lending. He is also on Twitter @SocialLoans.

Pay Off Debt

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Many of the reader questions I receive are inquiries on how to pay off debt, most in regards to the optimal order to pay off the debts.

Ways to pay off debt

I have mentioned this before, but it’s worth repeating – in most circumstances it is best to pay off debt in order from highest to lowest interest rate.  Put another way, if you have an auto loan at 10%, credit card 1 at 16%, and credit card 2 at 24%… it’s usually best to repay credit card 2, credit card 1, then the auto loan.  This route should cost you the least amount of money.

Some exceptions to this rule can include losing motivation to repay highest interest debts because of large balances, or debt with tax deductible interest like student loans and mortgages.  If the balances on your high interest debts are quite large, they may take awhile to pay off, possibly several years or more.  If that will cause you to lose steam you should consider repaying your debt in order from smallest to largest balance – as suggested in Dave Ramsey’s Financial Peace University.  Debt with tax deductible interest may be best left for last since it can reduce your tax burden… but determining the order is always unique to each situation, so generalizations should be considered just that.

Whatever your circumstances, I encourage you to try repay debt using good old fashioned discipline and self-management before paying someone to help you pay it off – but since many are beyond being able to help themselves… let’s consider some progressive options.

Debt consolidation using peer lending

Sometimes you’re better off consolidating a number of smaller debts into one.  Possible benefits of consolidation include lower interest rates and the simplicity of having fewer lenders.

I consolidated debt using Lending Club.  Read my Lending Club Review for details but in summary I consolidated an auto loan and 3 credit cards – each with higher rates than my Lending Club loan.  You don’t have to use peer lending to consolidate your debt, but it’s certainly a solid option.  Using Lending Club I repaid over $11,000 in just 7 short months – the process would have taken much longer had I not consolidated.

DIY debt management

If you can afford to repay debt but could use help organizing payments and determining who to pay first… check out DebtGoal.  Before you consider using a full-fledged debt relief company, I encourage you to give their service a shot.  In short, DebtGoal is a DIY middle ground between self service debt management and full service debt management.

I am in the process of writing a full review of their product, but have already checked it out and feel comfortable endorsing it.  Using their service should save you far more each month than it costs, and right now they’re offering a free trial.

Debt relief

If you are in financial trouble and need professional help, be sure to choose your debt relief partner company carefully.  I’ve been searching for a reputable debt relief services company for years and will confidently endorse a company once I find one I trust.  If you can manage your debt yourself, then do so, but if not… debt relief services with the right company can be a solid option.

I highly recommend this free professional debt relief analysis to help you get a handle on things. This company rocks, and I endorse them with confidence.

Debt management

Debt management plans are useful for those struggling to keep up with monthly credit card or other debt payments.  A company offering this service should help facilitate the consolidation of unsecured debt into a single monthly payment, negotiate lower interest rates and waived late fees with creditors, and provide comprehensive debt counseling.

Debt settlement

Debt relief companies also typically offer debt settlement services for those who cannot afford the monthly payments and are looking for an alternative to bankruptcy.

Other ways to pay off debt

To pay off debt, you can also:

However you pay off debt… just pay it off! Reducing your debt burden increases you freedom.  If I have a $2,000/month mortgage, a $1,100 in auto payments, $600 in credit cards, etc., etc., etc., I’m going to have a lot of pressure to repay that debt each month.  If I choose instead to sacrifice my wants and focus on true needs… I will simultaneously reduce financial pressure, increase giving,  and increase my freedom to spend my time doing things I enjoy rather than working to repay interest on debt.

I don’t know about you, but that’s very appealing to me!