Lending Club – How to Make Money in Peer to Peer Lending
As investors tire of the same old stocks, the same old bonds, and those boring ol’ mutual funds, peer-to-peer lending sites are finding that investors are willing to “get social” when it comes to investing, too. It isn’t all about the dollars and cents—some find that lending to others helps other people and themselves by providing attractive returns on their investment dollars.
Strategies for Peer to Peer Lending Success
P2P lenders should be careful in selecting each loan, as a single default is likely to wipe away much of their accumulated earnings. However, with that said, there are a few strategies that investors can take to mitigate risk, boost returns, and build a solid portfolio of performing loans on sites like LendingClub and Prosper:
- Take a word from the banking industry and look to borrow only to people who haven’t made a late payment. Late payments aren’t just a sign that the borrower can’t pay, they’re also a sign that this particular person obviously isn’t paying enough attention to the bills they have due. You’ll want to lend to people with at least half a brain about personal finance.
- Discounted notes are a great way to get an instant return on investment, and are usually found in loans that haven’t been around all that long. What’s this mean? Well it isn’t that rates are getting higher, just that a few unlucky investors are probably selling off their lending cows to buy milk, so to speak. Buy at a discount, and boost your performance!
- Credit score increases from borrowers indicate that the borrower has actually improved their financial standing since putting their loan on LendingClub. Usually, this has to do with the fact that the borrower is paying off other debt, as well as their LendingClub debt. This is a good sign, especially if the particular borrower was seeking a loan for debt consolidation!
- Diversification is the key to staying solvent. Try to spread your portfolio as thin as possible without ignoring the first three tips. Spreading your money around into different notes means you’re probably going to stay revenue positive even if someone stops paying. Plus, diversification means that each month you’ll have…say 50 loan credits that you can use to roll into another.
- Staying liquid in your investment portfolio means you won’t be forced to raise cash should you need to allocate funds elsewhere. Since Lending Club charges 1% of the balance to sell a note on the secondary lending club market, you’re best holding on to maturity unless you really, really need the cash!
Is LendingClub a sure-fire investment? Not always, but with P2P lending you’re the banker, and you get to decide which person is the right fit for your money. Plus, with yields rapidly approaching those on credit cards, able investors who can see the person behind the listing are sure to clean up if they can keep their defaults under control.
Besides, banks are paying less than a few percentage points on certificates of deposit, and they’re lending the money onto others for far more than that lousy 1% return. Take the banker’s job and go tap into the millions of dollars in interest revenue!