I'm going to be frank with you. P2P investing is ranked last in my best passive investments post. The returns are low and LendingClub has lost its luster from years ago. But if you are still interested in LendingClub, here is a review.
LendingClub is the leading P2P investment platform today. They are a publicly traded firm listed on the New York Stock Exchange and are heavily regulated by the SEC.
My annualized return with LendingClub is roughly 7.43% since 2014. I'm satisfied with my P2P lending returns, as it is a way to diversify my overall investments. So far in 2018, my P2P lending is outperforming the S&P 500 because the S&P 500 is flat for the year.
How I Invest In P2P
There are three guiding principles to my P2P lending philosophy.
The first is that I don't lend to people who have a history of more than two delinquent payments. I understand everybody runs into hardships and needs money sometimes. But if you've got three delinquencies, you're out. There's clearly something wrong with your financial situation or your ability to honor a contract.
The second lending philosophy is to not lend money to people who want to buy stupid stuff they don't need. You know, like a sail boat or a $50,000 wedding.
Finally, I'm primarily only lending money to people who are using P2P to consolidate their loans. Credit card interest rates are absurdly high. I'm surprised there are more limits in place. It's only wise to consolidate your debt to a lower interest rate if you can.
I think it is absolutely absurd that credit card companies can get away with charging 10X the risk free rate. It feels good to help borrowers save money. The average credit card debt per household is around $15,000 per the Federal Reserve.
Tips For Investing With LendingClub
Any type of investing is a learning process, and I’m happy that I have a much better understanding of how P2P lending works now that I’ve actually done it since 2012. Here are some tips from my experience investing with Prosper.
1) Check if you’re eligible first. Your eligibility to be an investor depends on your state of residence, and sometimes your income too. Not all states are created equal. Further details below.
2) Ease your way into it. If you’re a cautious, low risk investor like me, and aren’t sure if P2P lending is right for you, start off with AA and A rated notes to get comfortable with the process. You’ll still make great returns and can diversify into lower rated notes over time.
3) Don’t overlook your notification settings. I made the mistake of having too many email notification settings turned off, so I didn’t realize when notes I’d invested in expired or were paid off in full. So, I had cash just sitting in my account for months that I should have immediately redeployed.
4) Setup recurring transfers to fund your account. I didn’t realize until recently that Prosper has a feature that lets you automatically deposit funds into your account on a recurring basis. If you have the cash flow, automating is a great way to go.
5) Watch for and utilize monthly payments. Once you invest in notes that become fully funded and active, borrowers will start making scheduled payments every month that will be deposited into your account. You can then use that cash to invest in more notes or withdraw if needed.
If you don't have time to manually invest and track your investments, you can elect LendingClub to automatically investor your funds for you based on pre-determined criteria you select. For example, you can choose only A grade investors above who are looking to consolidate their debt who also haven't had a delinquency in the past three years.
Qualifications For Investing In P2P
There are certain requirements you have to meet in order to be eligible to be a lender with LendingClub.
- First, you need to be 18 years or older with a valid social security number. Institutional investors can also open accounts with a valid tax ID.
- Second, you need to have a checking or savings account.
- Third, you have to reside in an eligible state.
- And fourth, you may have to meet certain financial suitability requirements based on your state, indicated by asterisks in the table.
Financial Suitability Requirements
* Alaska, Idaho, Missouri, Nevada, New Hampshire, Virginia, Washington: Minimum AGI of $70,000 plus a minimum net worth of $70,000, OR minimum net worth of $250,000. Net worth excludes home, home furnishings, and automobiles. Lenders also can’t purchase Notes greater than 10% of their net worth.
** California: If you buy $2500 or less of Notes, your investment can’t exceed 10% of your net worth. If you go over $2500 in Notes, the previous applies plus a minimum gross income of $85,000 on your last tax return and for the current year, OR a minimum net worth of $200,000 and total investments can’t exceed 10%.
*** Maine: The Main Office of Securities recommends total investments do not exceed 10% of your liquid net worth (cash, cash equivalents, readily marketable securities)
Lenders and his/her spouse are considered to be a single person for these rules.
If you’re an individual, the minimum you can invest is $25, and the maximum aggregate investment (after meeting the above requirements) you can have is $5 million. There’s also a 1.0% annual loan servicing fee charged to all investors based on the outstanding principal balance of the borrower loan.
P2P Investing Strategy To Consider
I recommend focusing on higher quality borrowers in the A and B grade. Although you will receive a lower interest payment, the likelihood of getting paid back increases tremendously.
Focus on high quality borrowers who are looking to refinance their credit card debt. Credit card debt often runs in the 15% – 30% range, which is why to such borrowers, paying 6% – 10% is a good deal.
If possible, look for borrowers with a FICO score of at least 680, a debt-to-income ratio of at least 30%, no delinquency history, and positive reviews.
Despite focusing on high quality borrowers, I've still had delinquencies or defaults over the past five years of investing. As a result, it's important to diversify your loans into at LEAST 10 investments.
I've spoken to the team, and they recommend an even greater amount. They said with a 100 investment portfolio, you would have still made money during the financial crisis vs. -50% in the S&P 500.
As an alternative investment, I would keep exposure to Lending Club at no more than 20% of your overall investment portfolio. I personally keep alternative investments to roughly 10%, which includes real estate crowdfunding, venture debt, and private equity.
It's worth signing up with Lending Club and checking out the platform for free on your own. They've been around since 2007, and I foresee them continuing to grow over time. With interest rates rising, returns should also rise as well.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
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