A few months ago I decided to give social lending at Lending Club a try (my Lending Club review). I was intrigued by Lending Club’s business model, and having a little experience on the other side of the loan officer’s table, I thought maybe I could score a decent return.  Here are a few updates from my Lending Club progress report.

For my initial social lending experiment I decided to invest a small amount of money in two loans. Lending Club categorizes borrower profiles based on a variety factors such as credit score, income (which they verify).  I balance this against the borrower’s personal story.  Trying to read credibility in black and white is not always easy, but when you read someone’s story in the context of their other information you can usually get a feel for their authenticity.

To spread my risk out a bit, I balanced investments in Lending Club borrowers between a medium-risk borrower with a low-risk borrower. Both loans are being paid and are in good standing, yielding an approximate net annualized return on investment of roughly 11%.  Not bad for a rookie.

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Advantages of Investing With Lending Club

• You have the opportunity to earn better returns than traditional market investing
• Lending Club is selective about the types of borrowers they allow to join
• Flexibility to trade notes, or hold them and reinvest (or withdraw) the interest
• Free to join

If you are interested in investing with Lending Club I suggest starting with a small percentage of your overall portfolio until you get your feet wet.  I think you’ll find their platform very straightforward, whether you decided to invest in individual loans, or a collection of loans.  Of course, I haven’t invested enough to exactly live off passive income at this point, but it’s a start, and the potential is there for investing more down the line.

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.