Apr 13, 2009

Lending Club Part One: Getting started

I first mentioned my interest in peer-to-peer lending back in November 2007, when I branched out of my comfort zone and bought an individual stock. (A tiny portion of a Berkshire Hathaway B stock share.) Back then, I was thinking about continuing to expand beyond my comfort zone of investing by venturing into P2P lending, and have mentioned it periodically since, but it's always been on the backburner.

Until now. I received a special bonus for joining, and I'm not one to turn down a chance to learn for free, so I signed up. Others have written extensively about Lending Club, Prosper, and P2P lending in general. (Try The Dough Roller, Mapgirl's Fiscal Challenge, Lazy Man and Money, and Moolanomy, just for starters.) So I won't write about the basics of P2P lending because I just don't have the inclination or time, and I probably wouldn't do it as well as DR or Pinyo. Instead, I'll just share my personal experiences and impressions along the way.

I was a little apprehensive about signing up, just because I am always cautious about disclosing my personal information. However, I knew I'd have to disclose some information and didn't feel Lending Club was overly intrusive. I didn't want to link a bank account, and I didn't have to - apparently linking a PayPal account is enough, although I didn't even have to do that since I wasn't adding any funds to my account.

Once I'd signed up, picking loans to invest in was fairly straightforward. Mapgirl's frank posts about loans that aren't performing well convinced me that I didn't want to take a lot of risk. Even the lowest risk loans at Lending Club earn close to 8% interest, so it's still a fairly decent return. I had the option of letting Lending Club automatically choose my loans for me based on the risk I was willing to take, but instead I chose four $25 loans manually.

I selected borrowers who all had a solid credit history and credit score, seemed to have a good reason for wanting to borrow money, and a low debt to income ratio. I also chose one loan that seemed like it might not fund to see what that's like. And if that loan does fund, I'll still consider it my greatest risk, because despite the good credit history, credit score, debt to income ratio and decent income, I'm a little disturbed by the revolving credit balance of nearly $42,000 and projected monthly payment of over $500 (the borrower's gross income is over $5000 per month, but one spouse is currently unemployed). If I wasn't willing to take a little extra risk because this is a learning experience, I wouldn't have selected this loan.

So that's where I stand now. All of the loans I selected have yet to be fully funded and processed, but I should have an update in about a month!


Student said...

Trying it out with their $100 is worth it, but I would not risk my own money at the moment. Too many loans are defaulting at the moment to make it profitable for an individual with no lending experience.

Pinyo said...

Thank you for the mention. Definitely doesn't hurt to try with their money. I think you're doing the right thing by sticking to the lowest risk loan; especially, because 4 loans don't give you enough diversification to reduce default risk.

And Student is right, I wouldn't risk money that you can't afford to lose. The industry is new and there are risks that may not be immediately apparent.

Lauren said...

Thanks for sharing your experience, you make me feel like an old timer.

I have been investing in Lending Club loans for a year now, and so far so good. Started with $500 on As and Bs only to try it out (like you, I'm very risk averse). Then they went into a quiet period which foreced me to see how those first loans did after 6 months before investing more. I set it and forgot it. After the quiet period, they were all current and paying on time. woohooo.

So I decided to invest more across A, B, C and D. This investment does not seem to make sense unless you invest in many many loans to be able to spread the money.

Only 3 loans late or default out of 200+, and even if it goes to 15, I'll still be making a good 8% returns. Can't beat that!

Chief Family Officer said...

@Student - Apparently no A loans have been defaulted over at LC, but you're right, I wouldn't risk my own money :)

@Pinyo - Good point about diversifying the loans. I'll keep that in mind in the future.

@Lauren - You are an old timer! And wow, it sounds like you're doing just great - I'm very impressed!